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Event Study
Estimate abnormal stock returns around events.
Step 1. Estimate β and α.
Step 2. Use actual stock market return to predict the expected return.
Step 3. Calculate abnormal return.
S&P
Ticke Return 500 Bet Alpha Expecte Abnorma
Date Name
r % Retur a % d Return l Return
n%
AIRTRAN
2010092
AAI HOLDING 3.64% 2.12% 1.17 -0.1%
4
S
AIRTRAN
2010092 -
AAI HOLDING 61.32% 1.17 -0.1%
7 0.57%
S
AIRTRAN
2010092
AAI HOLDING -0.14% 0.49% 1.17 -0.1%
8
S
Three day cumulative return
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You can invest in two stocks: GM and Apple. Each stock trades for $100 today and you
trade 1,000 shares. In one year, Apple trades for $125 while GM trades for $75.
Calculate the returns to the following strategies.
1. Long position in Apple
2. Long position in GM
3. Short position in Apple
4. Short position in GM
Liabilities Today
(shares)
Profit (dollars)
Fill in the matrix with the profit (in dollars) of each strategy
Apple GM
Stock Price Rises Stock Price Falls
Long Position
Short Position
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You engage in a long-short strategy with Interpublic and Omnicom (rival advertising
groups). You go long 700 shares of Interpublic, currently trading at $45 per share. You
short 900 shares of Omnicom, currently trading at $35 per share. The price of
Interpublic rises to $48 per share. The price of Omnicom rises. What is the maximum
price of Omnicom stock that will allow your strategy to be profitable?
International Perspective
Us is not the largest in banking, or debt (right behind the Euro)
We are the largest in equity
International Stock Markets
o Pros
Risk can be eliminated by diversifying your portfolio
Exposure to growth in wealth
o Cons
Lack of information
International regulation differences
Exchange rate risk or political risks
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