Question

According to the Efficient Market Hypothesis (EMH):

a) Explain what an Event Study is.

b) Explain what a Cumulative Abnormal Return is.

c) Draw a graph showing the price reaction to the arrival of good news, according to the Efficient Market Hypothesis.

Answer 1

Event Study is,

An event study describes a technique of empirical financial research that enables an observer to assess the impact of a particular event on a firm’s stock price.

Cumulative Abnormal Return is,

The cumulative abnormal return, which is simply the sum of all abnormal returns over the time period of interest. The cumulative abnormal return thus captures the total firm-specific stock movement for an entire period when the market might be responding to new information.