MEASURING SECURITY PRICE ERFORMANCE Brown and Warner [1980]

Siraprapa Watakit 5502310013

Agenda
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Overview of The Paper Contribution Event Study In General Questions and Concerns Experimental Design & Analysis Conclusion

Overview of The Paper

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The paper mainly focus about the various measurement methods, models and statistical tests which employed in Event Study Research There are quite a number of factor which may lead researcher to commit Type-I and Type-II errors Especially when some model/test assumption doesnt hold The investigation in this paper shows that simple model provides powerful test results that sometimes outperform sophisticated models

Contribution
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This paper provide a very detailed summary of methods, models and test tools which are currently widely used in event study research The purpose of this paper is not the label best model/tool for event study but rather give reader factors to be consider when each of them is being employed In order to avoid Type-I/II Errorswrong inference

What is Event Study?

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ES is a study about events and its effects towards security price e.g. when company announces news, will stock price increase(decrease)? ES provides a direct test in market efficiency the market absorbs information quickly, there should not be abnormal returns after the event Abnormal returns after event are inconsistent with market efficiency

To do Event Study, we need?

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To perform the ES, we need to know/assess these things What is normal and abnormal? When did it happen? certainty/uncertain? What kind of statistical test tool we should use? What methodology? What we should avoid?

H0: No Abnormal Returns Type-I: Reject H0 when H0 is True(false reject) Type-II Failed to reject H0 when H0 is False(false accept)

Measuring Performance: General Consideration

Define Abnormal i.e. compare ex ante and ex post Mean Adjusted Return

Market Adjusted Return Maker and Risk Adjusted

Abnormal performance is an unbiased measurement

Concerns/Question
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Which model to use? The complicated/sophisticated one does not necessary outperform the simple one assumption is critically related to the return generating process and yet critically related to the test tool to test H0 Besides these 3 models, there are plenty other model Black models, Fama-Macbeth and etc. Is there other sensitivity factors to the model/test? Normality, clustering event, equal and value weighted index, time? Roll critiques there is no way to find market efficient portfolio

Experimental Design
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Generates 250 samples Each sample consists of 50 random security at random time (on average, there should be no abnormal performance) To investigate models/test-tool, repeat the models/test-tools on the above sample introduce fake event into the above sample and repeat the model/test-tools again 0 indicate event date fake abnormal include 1%,5%,15% and 20% increase in return

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Simulating the methodologies across samples: Procedure and initial results

Rejection frequency with t-tests Mean Adj.Ret performs no less than others Parametric vs. NonParametric tests Sign test and Wilcoxon seems to be problematic
There is no abnormal return here, we would expect less or zero #rejection There is actual 1%, 5% no abnormal return here, we would expect much of #rejection

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Simulating the methodologies across samples: Procedure and initial results

Compare between actual and assumed distribution: even when there is no abnormal return, the actual distribution is significantly different than assumed distribution
at 0.05 sig.level, reject H0: student-t distribution The actual distribtution is leptokurtic and skewed to the right

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Simulating the methodologies across samples: Procedure and initial results

Different risk adjustment methods: explicitly adjusting systematic risks doesnt help increasing the rejection rate

The used of prior information

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Previous 3 table results are from the setup that assumed certain event date is known the direction of abnormal return is known(one tailed test) But what if it is not? Since exact date is unknown, we will use event windows Since direction is unknown we will use two-tailed tests

The used of prior information

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The rejection rate drop sharply, event for 15% abnormal return Shorter windows(-5,5) gives higher rejection rate Two tailed gives lesser rejection rate

The used of prior information

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The Cumulative Average Residual:

month -10 Sample#1 month 0 month 10 AR-10 CAR0 CAR10 21CARs

Repeat the same application to each of 250 samples, then For each event-month, we will have 250 CAR from 250 sample Trace the fractiles of this 250 CAR in each even-month

CAR Traces /w and /wo abnormal

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From the comparison, no strong distinguish. CAR can appear significant + or trend event when there is no abnormal return However, with (-5,5) we can see something

No Abnormal

5% Abnormal(-10,10)

5% Abnormal(-5,5)

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The Effect of Clustering: Event-month

Clustering can be a problem because it reduces the power of test Mean Average Return perform poorly in this case Clustering may not be random e.g. group of sample which are from same industry would tend of have event at a similar or same time

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The Effect of Clustering: Betas

When securities have higher betas, it can be expected that the power of the test will be lower when compare to those with smaller beta smaller fluctuation will be easier to reject

rejection rate is higher for <1

Choice of Market Index

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Previous results use equal weighted index With value weighted index , the models suffer from reject too often, except for Market Model Residual

MAR rejects too often, but MMR is ok

Conclusion
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There are many factors to consider when one wants to do event study i.e. models, tests, assumed distribution, clustering, CAR random walk trends,choice of index and sample size, in order to avoid making wrong inference So far, a simple method Means Adjusted Return perform no less than other sophisticated models(Only except event clustering case)