Event studies allow you to estimate how asset prices – i.e., prices of stocks, bonds, or CDS – react to announcements of economic events that include new information relevant for the value of the underlying assets. The theoretical framework behind the event study methodology is the theory of efficient capital markets proposed (mainly) by the 2013 Nobel laureate Eugene Fama from the University of Chicago.
The blueprint of a standard event study is presented in the following. The underlying assumption of the event study methodology is that the capital market is semi-strong form efficient. This form of market efficiency assumes that asset prices comprise all publicly-available information relevant for price formation. You should follow the 9 steps provided below to accurately conduct an event study:
Abnormal Returns are the crucial measure to assess the impact of an event. The general idea of this measure is to isolate the effect of the event from other general market movements. The abnormal return of firm i and event date is defined as the difference of the realized return and the expected return given the absence of the event The expected return (henceforth referred to as normal return) is
Long-term event studies aim at identifying if certain events affect asset prices over long periods of time, i.e., several months or years. Thus, they can be interpreted as tests of performance persistence. Prominent examples include examinations of long-run stock price performance after initial or seasoned public offerings of equity (see, Ritter, 1991; Loughran and Ritter, 1995, among others),