EMF Quizlet

What is the purpose of an event study?

To test the change in stock or bond prices around specific events, such as corporate earnings announcements or macroeconomic news.

What are the three forms of the Efficient Market Hypothesis (EMH)?

Weak Form: Prices reflect all information from past records. Semi-Strong Form: Prices reflect all publicly available information. Strong Form: Prices reflect all relevant information, including private data.

What are the main steps in conducting an event study?

1. Identify the event and its timing. 2. Specify a benchmark model for normal stock return behavior. 3. Calculate and analyze abnormal returns around the event date.

How are abnormal returns (AR) defined?

Abnormal returns are the actual return minus the benchmark or normal return (AR = R - NR).

What is the mean-adjusted returns model?

It uses the average return over a specified period as the benchmark for normal returns.

What is the market model residual approach to calculate abnormal returns?

It defines abnormal returns as the residuals from a regression of stock returns on market returns, accounting for the stock's beta.

Why are cumulative abnormal returns (CAR) important in event studies?

They aggregate abnormal returns over a period, providing a measure of total abnormal performance due to the event.

What is the significance of testing cumulative abnormal returns (CAR)?

To determine whether abnormal returns over a specified interval are significantly different from zero.

What is the Fama-MacBeth procedure used for?

To estimate parameters in panel data regressions by averaging coefficients over time and adjusting for serial correlation.

What is the Fama-French three-factor model?

A model extending the CAPM by adding size and value factors to explain stock returns: SMB (Small Minus Big): Small firm returns minus large firm returns. HML (High Minus Low): High book-to-market ratio returns minus low.

How does the Newey-West correction adjust standard errors?

It corrects for heteroskedasticity and autocorrelation in regression residuals.

What are the advantages of using panel data?

1. Captures both time-series and cross-sectional variation. 2. Controls for unobservable variables constant over time or entities. 3. Allows for studying changes in relationships over time.

What is the difference between fixed effects and random effects models?

Fixed effects: Intercepts vary by entity but are constant over time. Random effects: Intercepts are drawn from a common distribution and vary cross-sectionally.

What is the weak form of the Efficient Market Hypothesis (EMH)?

Prices reflect all information contained in the record of past prices.

What is the semi-strong form of the Efficient Market Hypothesis (EMH)?

Prices reflect all past and publicly available information.

What is the strong form of the Efficient Market Hypothesis (EMH)?

Prices reflect all information, both public and private.

What is the formula for calculating abnormal returns (AR)?

AR_it = R_it - NR_it, where NR_it is the normal return.

What is a mean-adjusted returns model?

A model where the normal return is the average return over a pre-specified estimation period.

What is the purpose of cumulative abnormal returns (CAR)?

To measure total abnormal performance over a specified event period.

How are cumulative average abnormal returns (CAAR) calculated?

CAAR = (1/N) ΣCAR_i.

What is the role of t-tests in event studies?

To test whether abnormal returns are significantly different from zero.

Why are Newey-West standard errors used?

To correct for heteroskedasticity and autocorrelation in time-series data.

How does the Fama-French three-factor model extend CAPM?

By including SMB (size effect) and HML (value effect) factors alongside market returns.

What is the key assumption of the fixed effects model in panel data?

The constant term varies across entities but remains constant over time.

What is the formula for market model residual abnormal returns?

AR_it = R_it - (α + β R_mt).

Why is event clustering a problem in event studies?

It causes cross-sectional correlation, invalidating standard t-tests.

What is the main advantage of the random effects model in panel data?

It allows for time-invariant variables and fewer parameters than fixed effects.

What are heteroskedasticity and autocorrelation consistent (HAC) standard errors?

Adjusted standard errors that correct for heteroskedasticity and serial correlation.

What is the purpose of the sign test in event studies?

To test whether there are as many positive as negative abnormal returns, assuming symmetry.

What are rank tests used for in event studies?

To account for the magnitude of abnormal returns without normality assumptions.

What is the calendar time returns method?

A long-horizon event study approach that regresses portfolio returns on risk factors over time.

What are buy-and-hold abnormal returns (BHAR)?

Returns calculated as the difference between the compounded realized and normal returns over a holding period.