Expectations of Infrequently Occurring Jumps in Returns: The Reclined 7-Curve Shape of Cumulative Abnormal Returns

36 Pages Posted: 16 Mar 2002

Abstract

Following Elton (1999), we argue that realized returns are often a poor proxy for expected returns. Rational expectations of infrequently occurring jumps in returns will cause expected and realized returns to differ systematically over long periods. We show both theoretically and, using a sample of 1892 takeover target firms, empirically that realized stock returns are a systematically biased proxy for expected returns prior to a partially anticipated jump return (probability between 0 and 1). Our results have important implications on event studies if market participants anticipate the event.

Keywords: Expected return, event study, peso problem, realized return, takeover

JEL Classification: G10, G12, G14

Suggested Citation

Penttinen, Aku, Expectations of Infrequently Occurring Jumps in Returns: The Reclined 7-Curve Shape of Cumulative Abnormal Returns. EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=302318 or http://dx.doi.org/10.2139/ssrn.302318
No contact information is available for Aku Penttinen

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