7.2 Steps for an event study

We have to perform the following steps:

1. Obtain estimates of the risks by regressing daily stock returns on the risk factors. Usually we use returns from the past 250 trading days (1 calendar year).

2. Use the risk estimates and risk factors on the day of the event to estimate expected stock returns.

3. Test whether the realized stock returns are statistically different from expected stock returns. Note that the expected stock returns will be estimated with their prediction intervals. As long as the realized stock returns do not fall in the prediction interval, we can conclude that the event is likely to be value relevant.

We now turn to doing an event study analysis.