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An Event Long-Short Index: Theory and Applications†

An Event Long-Short Index: Theory and Applications† AbstractWe propose a stock market-based measure to capture initial beliefs about an event’s effect on firm profits, which may be used to measure whether initial expectations are subsequently realized. Our “Event Long-Short Index” is the difference in market-capitalization-weighted returns of firms that outperform versus underperform the market on the event date. We use post-event index returns to measure whether initial beliefs are reinforced or attenuated. We apply our approach to the 2016 US presidential election and Brexit referendum to illustrate the index and its interpretation and to validate it, showing that it moves as expected following subsequent political and business news. (JEL D22, D72, D83, G14, L25) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review: Insights American Economic Association

An Event Long-Short Index: Theory and Applications†

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References (17)

Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
2640-205X
eISSN
2640-2068
DOI
10.1257/aeri.20180399
Publisher site
See Article on Publisher Site

Abstract

AbstractWe propose a stock market-based measure to capture initial beliefs about an event’s effect on firm profits, which may be used to measure whether initial expectations are subsequently realized. Our “Event Long-Short Index” is the difference in market-capitalization-weighted returns of firms that outperform versus underperform the market on the event date. We use post-event index returns to measure whether initial beliefs are reinforced or attenuated. We apply our approach to the 2016 US presidential election and Brexit referendum to illustrate the index and its interpretation and to validate it, showing that it moves as expected following subsequent political and business news. (JEL D22, D72, D83, G14, L25)

Journal

American Economic Review: InsightsAmerican Economic Association

Published: Dec 1, 2019

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