CHAPTER 11

Event Studies

How do events, such as unexpected news, affect the price of a stock? Traders believe that having early knowledge of an impending piece of news—good or bad—provides them an information advantage that they can exploit. If they know the true value of a stock (i.e., after the effects of an event) in advance, they can buy before its price rises or sell before it falls.

But foreknowledge alone—or more likely, a strong hunch, termed conviction in the industry—isn’t enough. Even if you are highly confident that an upcoming event will raise or lower a given stock’s price, you need to forecast by how much that price will change to make a rigorous portfolio decision. And you must recognize the possibility that other investors have ...

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