Capital Market Research
• What is it? Investigate market response to information—what and how? •What are the maintained hypotheses?
market efficiency, rational and risk-averse investors
•Approaches market reaction: event methodology*** market valuation: regression analysis • Applications test market efficiency test effectiveness of standards suggest new standards and/or regulations
• What is the purpose? Market reaction to new information • What does new information mean? Unexpected or surprise • How to observe market reaction to new information?
select observation window : (-1, 0) select sample calculate expected (normal) return: Ri = β0 +β1Rm calculate unexpected (abnormal) return: CAR = R- (β0 +β1Rm) test the significance of CAR robust check: e.g., using alternative measures or windows
control over event clustering: (-7,7)
data availability: Compustat and CRSP
• What if the maintained hypotheses are not met? • What if we fail to solve some critical econometric issues? e.g., self-selection bias return correlations
If we do not use event methodology, what else we can use?