Does the Market Model Provide a Good Counterfactual for Event Studies in Finance?

Abstract

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