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MN-3002 Financial Market Efficiency

SEMINAR 4

1. Go to http://www.zacks.com/earnings/earnings-reports and identify the top 5 positive earnings surprises based on earnings announced on September 6 (Tuesday), 2016. Identify the tickers for the top 5 positive surprises. Next, go to finance.yahoo.com, download daily prices for these 5 securities from August 1, 2015 until November 6, 2016 and compute their returns.

Note: This instruction/date is outdated as the website no longer retains data that old. As a result, you will be provided the tickers in the EXCEL file regardless and this seminar is for illustration purpose only.

2. Download prices of the iShares MSCI World index fund (ticker: URTH) during the same time period as in the previous point. Compute the return on the index for each day t and use it as a proxy for the return on the market portfolio (R_M). Next, compute abnormal returns (AR) for each of the 5 securities as follows:

ARit = Rit - Rmt where i = 1,2,...,5

3. For each firm, test whether the earnings announcement has an effect on stock prices around the event time. In order to do that, test if abnormal returns for each firm are statistically different from zero on the day of the announcement (t=0). Then, compute the cumulative abnormal returns (CAR) and test whether they are statistically different from zero in the period preceding the event (21 days before the event) and following the event (43 days after the event).

4. Compute average abnormal returns and average CAR in order to test whether, on aggregate, the sample of firms under analysis generates non-zero returns in the pre-event window, the event day and the post-event window.

5. Plot the average as well as each firm’s CAR during the entire event window (from t-21 to t+43). Can you say that the market is reacting in an efficient manner?

6. Do point 1 to 5 for the tickers with the top 5 negative surprises.