Dear All,
I’m conducting an event study for the yearly inclusion and exclusion of some stocks (from different industry sectors) in an index.
I need to calculate the abnormal return per each stock upon inclusion or exclusion from the index.
I have some questions:
1- How to decide upon the length of backward time to consider for the “Estimation Window” and how to justify ?
2- Stock return is calculated by:
(price today – price yesterday)/(price yesterday)
OR
LN(price today/price yesterday)?
I see both ways are used, although they give different results.
Can any of them be used to calculate CAR?
3- When calculating the Abnormal return as the difference between stock return and a Benchmark Return (market return), The market (benchmark) return should be the index itself (on which stock are included or excluded) ? Or the sector index related to the stock?
Appreciate your advice with justification.
Many thanks in advance.
Dear Ivan,
Thank you for your answers.
1- for point (1), can you clarify a criteria to be used to decide upon the period to consider for estimation window ? (How to justify the chosen estimation period?)
3- For point (3), let me rephrase my question:
If I'm conducting an event study for the potential change in return of a certain stock (Stock X) when included/Excluded in certain index (Index Y),
to calculate the normal expected stock return , you need to correlate the (stock X) return in the estimation period with a market return index,
this market return index for correlation: should it be the sector index for which the (stock X) belong? or the (index Y) ?.
Why?
Thanks
You can find detailed information on
http://www.eventstudytools.com/
Hi there, I am using Eventus software and I am wondering how the software computes the Market index in order to calculate abnormal returns?
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