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The goal of an event study is to evaluate the change in value of a particular stock, due to a given type of public information. An event study is generally performed in a cross-sectional way with a sample of stocks and a given type of information release to the market. A series of "abnormal returns" is computed for each stock around the day of the announcement of the operation. These abnormal returns are cumulated in order to see the possible "drift" in the accumulated wealth. Next they are averaged out among all stocks in the sample, placing on a common origin the annoucement day of each . For instance, to study the effect of a takeover (OPA or OPE in French) on the wealth or shareholders on both sides (the incumbent firm and the target firm), one takes a sample of such operations. For each company, one computes the daily "abnormal return" (see next for th emeaning of this term). Then these returns are cumulated since the origin of the series. All these series of abnormal returns are then averaged out, day per day, taking the date of the announcement the common origine of time. Using event study for a single company is somewhat uninformative since there is in general too much noise on the markets to discernate a signal. But in spite of this, it can be useful perform it in order to see whether an effect can be detected. Abnormal returns: An abnormal return is a return which is in excess or in default of the "normal" expected return such as provided by a (theoretical) market model. The most commonly used model is one factor model inspired from the CAPM and called the "market model". It says that the (daily) return of a stock depends is sensitive to the return on the market according to a certain beta and that the excess or default return is a white noise (zero expected value, constant variance, no autocorrelation (i.e. correlation of successive values with an abitrary lag). Formally, the theoretical return Rjt on stock j and day t is assumed to be linked with the market return Rmt, on the same day through an equation of the type : Rjt = α i + β i*Rmt + ε t where ε t is a "white noise" (i.e. a series random variable ε E(ε t) = 0 and Covariance (ε t, ε t+δ ) = 0 quel que soit δ ≠ 0) So the expected return at t is : E( Rjt ) = α

i

t

such that

+ β i*Rmt

the method consists in three steps 1) Get the two series of returns respectively for the stock under study and the market index (e. To see whether there is an effect. So. The period over which estimation is made should exclude the period around the event in order not to perturbate the parameters by the effect of the annoucement. Usually. Usually.NB this equation is different from CAPM which is expressed in "expected value" and which takes into account the "safe" rate. So α and β can be estimated for instance on a series of returns for the five previous years.E(Rt) = ROjt . there are estimated by regression of the series of observed returns for j on the series of observed market returns. But a specific study of a particular event. one can take much shorter windows (e. S&P or SBF 500 etc…) Call ROjt the observed return of stock j at t Call Rmt the return of the market index at t 2) Compute the "abnormal return" on the the stock at t: ARjt = ROjt .g 1 month before and 1 month after) The cumulated returns are computed from the first day of this window. one takes a "window" for the event which begins 6 months to A year before the announcement and terminates 6 months later.β i*Rmt 3) Compute at each date t the Cumulated Average Return (CAR) as the sum of all previous returns since a given date (see further for its determination) α j and β j are two parameters that describe stock j.α i .g. one needs to make assumptions about the underlying stochastic processes and perform statiscal tests which are sometimes quite sophisticated. If the process are supposed normal (this is reasonable if there is not too much kurtosis and asymmetry in the distribution of returns) then a Student t-test is usually performed.( α i + β i*Rmt) = ROjt . .

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