So typically, then the first step will be to estimate the index model,

such as this one, to estimate the parameters.

Then identify the dates of interests, compute the abnormal return

surrounding of all around the states, and assess the magnitude

of the typical abnormal return to determine the impact of the announcement.

So in fact, we looked at such an event study for

merges in one of the previous lectures.

So you might remember this picture from before.

The authors of this study were interested in knowing stock

market reaction to takeover announcements.

And remember, as I mentioned before,

the announcement of a takeover is good news for the firm,

because typically shareholders get paid a premium for their shares.

So, the announcement of a take over attempt

should cause the stock price to jump.

So, what you see in this graph on the exists you have

the dates relative to the announcement dates right,

the announcement date is marked as zero and on the y axis,

you have the cumulative abnormal return,

which is simply the sum of the abnormal returns over this period.

We estimated the parameters and the computed the abnormal return,

and what you see is a large positive abnormal return

on day zero, on the announcement date.

So this is consistent with the efficient market hypothesis

that once the news becomes public, the price jumps.

Okay, so in this lecture you'll learn about event studies.

Event study methodology is very widely used

is a tool to measure the impact of wide range of events on security prices.

So, for example, the SCC regularly uses events studies to measure

the illegal gains by traders who may have violated insider trading or

some other securities laws.

So this is one application of the event study methodology.