Expectations of Infrequently Occurring Jumps in Returns: The Reclined 7-Curve Shape of Cumulative Abnormal Returns
36 Pages Posted: 16 Mar 2002
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: Suggested Citation