An Event Long-Short Index: Theory and Applications
American Economic Review: Insights
vol. 1,
no. 3, December 2019
(pp. 357-72)
Abstract
We propose a stock market-based measure to capture initial beliefs about an event's effect on firm profits, which may be used to measure whether initial expectations are subsequently realized. Our "Event Long-Short Index" is the difference in market-capitalization-weighted returns of firms that outperform versus underperform the market on the event date. We use post-event index returns to measure whether initial beliefs are reinforced or attenuated. We apply our approach to the 2016 US presidential election and Brexit referendum to illustrate the index and its interpretation and to validate it, showing that it moves as expected following subsequent political and business news.Citation
Fisman, Raymond, and Eric Zitzewitz. 2019. "An Event Long-Short Index: Theory and Applications." American Economic Review: Insights, 1 (3): 357-72. DOI: 10.1257/aeri.20180399Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- L25 Firm Performance: Size, Diversification, and Scope