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In finance, an abnormal return is the difference between the actual return of a security and the expected return.Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all of which can contribute to an abnormal return.
Thereafter, the method deducts this 'normal returns' from the 'actual returns' to receive 'abnormal returns' attributed to the event. Event studies, however, may differ with respect to their specification of normal returns. The most common model for normal returns is the 'market model' (MacKinlay 1997).
In finance, Jensen's alpha [1] (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance instead of a market index.
Negative abnormal returns (α): Below-average returns that cannot be explained by below-market risk Security characteristic line (SCL) is a regression line, [ 1 ] plotting performance of a particular security or portfolio against that of the market portfolio at every point in time.
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For firms that report good news in quarterly earnings, their abnormal security returns tend to drift upwards for at least 60 days following their earnings announcement. Similarly, firms that report bad news in earnings tend to have their abnormal security returns drift downwards for a similar period. This phenomenon is called post-announcement ...
r it is return to stock i in period t r f is the risk free rate (i.e. the interest rate on treasury bills) r mt is the return to the market portfolio in period t is the stock's alpha, or abnormal return is the stock's beta, or responsiveness to the market return
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