Does the Market Model Provide a Good Counterfactual for Event Studies in Finance?
30 Pages Posted: 7 Dec 2017
Date Written: December 7, 2017
We provide a common framework that relates traditional event study estimation methods in finance with a modern approach for causal event studies. This framework is called synthetic portfolio and is a particular case of synthetic control methods. We provide a simulation exercise and an empirical application to evaluate the performance of the method. In addition, synthetic control methods provides a reliable framework, for test based on the abnormal returns, that overcomes some difficulties in the traditional test. We conclude that the market model provides a counterfactual as good as a synthetic control.
Keywords: event studies, synthetic control methods, portfolio optimization, merger announcements
JEL Classification: G11, C13, G34
Suggested Citation: Suggested Citation