Market-adjusted and two-factor models - event study, Corporate Finance

Market-Adjusted and Two-Factor Models - Event Study

As mentioned previously, you can use several alternative models to calculate a security's expected return. The market-adjusted model is simplest in design and is often used to get a first impression of stock price movements. When using the market-adjusted model, you calculate the abnormal return by taking the difference between the actual return of the security and the actual return of the market index. Thus there is no need to run OLS regressions to estimate parameters. In fact, all you need is the returns at the time of the event. However, when testing the abnormal returns for statistical significance, you still need to gather returns for the estimation period. The two-factor model compares the returns from the market and the industry. You calculate a stock's expected return using parameters from a regression of the actual returns against the market and industry returns during the estimation period. The industry returns are included primarily to account for industry-specific information in addition to the market- specific information. To calculate the abnormal return you subtract from the actual return the portion that can be explained by the market and the portion that can be explained by the industry. As Brown and Warner (1985) showed, the results in a large sample of events are not especially sensitive to your choice of estimation model. However, if you are dealing with a small sample, you should explore alternative models.

Posted Date: 2/27/2013 7:50:14 AM | Location : United States







Related Discussions:- Market-adjusted and two-factor models - event study, Assignment Help, Ask Question on Market-adjusted and two-factor models - event study, Get Answer, Expert's Help, Market-adjusted and two-factor models - event study Discussions

Write discussion on Market-adjusted and two-factor models - event study
Your posts are moderated
Related Questions
Allied Managed Care Company is evaluating two different computer systems for handling provider claims. There are no incremental revenues attached to the projects, so the decisio

Question: a) The new capital management framework provides an upgrade of the old version in terms of new risk management techniques. What is the scope of application for the n

You are a ceo of a sotware firm that has limited access to debt equity markets. The average return on last year projects is 28 % . and cost of capital is 12%. would npv pr Irr be

Your boss is trying to figure out when to replace an important piece of machinery in your main production facility.  The Siemens NR550, costs $5.45 million brand new and generally

Net present value of this project: The following I/S is based on the information associated with a new project. Answer the questions. Projected Income Statem


Determine current stock price: 1) IBM issued 10-year bonds with a par value of $1,000 and a coupon rate of 10%, paid semiannually. The yield to maturity on this bond is 12%.

Question : (a) Electronic banking can be defined as "the automated delivery of new and traditional banking products and services directly to customers through electronic, int

Fisher and Raman (1996), Fisher et al. (2001) propose to let a number of experts within a company estimate the demand for a product. The demand is calculated as the average of the

Can you hepl me with financial a accounting assignment?