Expert Dialog

Question #38: Testing for AAR and CAAR

Dear Dr. Müller

Brown and Warner (1985) suggest calculating the t-value as the ratio of the AAR to its estimated standard deviation from the estimation period. Is this appropriate? And don't I have to multiply it by the square root of N as your your significance test formula shows?

Furthermore, they also suggest calculating the test statistic over a interval as the ratio of CAAR to its estimated standard deviation. How can I calculate the standard deviation of the CAAR?

Thank you for your help.

Answer by Dr. Simon Müller:
There are different ways to write the formula. You can use AAR in the numerator or the sum over the AR. Depending on that definition you get different loooking formulas. 
Question #37: EVENT STUDY

Hi, I have a question about using free event study which is available on the website. the problem is that when I use a credit rating base index as the market price and I have 5 broad categories for the market price in each day.My problem is that I don't know how to list the five market price for each date in the Market data file and how to clarify it clarify my firm dataset and request file? I cannot understand what is the variable group in request dataset.
I already have the file for abnormal return and I just want to use this file to calculate t statistic, is there any simple way for that?
could you please help me to solve this issue?

Answer by Dr. Simon Müller:
Both request data files are in the long format as described on So firms are identified by the first column, dates by the second, and on the third you put the closing price. For the market data you have in the first column the market index indentifier, on the second the date and on the third the closing price. You can calculate test statistics with our free web tool.
Question #36: Application Error


I try to run your AR calculator with your sample data. It doesn't work: I got an Application error message ???


Answer by Dr. Simon Müller:
Possibly your data is wrong formatted.
Question #35: Patell z test with Mean-Adjusted Model

Dear Mr Müller,

from my point of view using the Patell z test in combination with the mean-adjusted model seems counter-intuitive, since the S(ARi,t,) includes data from a market index (R(m,t)), which are not relevant for the calculation of mean-adjusted AR's. Still your event study engine is calculating it. Would you please elaborate whether you agree with me here, or respectively, why you don't?

Basically, I am using both the mean-adjusted and the market model and I would like to compare the two models' results, which is obviously not possible when using different significance tests. (Due to several adjustments I have made, I am using your engine solely for robustness checks.)

I am looking forward to your reply.

Best regards,

Answer by Dr. Simon Müller:
Dear Mark, for the mean-adjusted model, we use a different formula: s^2_ar = s^2_ar * (1+ 1 / M_i). Best, Simon
Question #34: long term event study analysis

I want to measure long term performance (after 1 year, 3 years and 5 years) of IPO for 400 companies between 2000 to 2010. I want to use BHAR to measure the performance. but I don't know how prepare input data to be used in STATA. I have data in table format in excel as follows:
1. daily market return between 2000 to 2010
2. daily company return between 2000 to 2010
3. IPO listing for each company.

the questions is:
1. how can I prepare my data as you suggested using Comma-separate-value because I have up to 400 companies to go one by one?
2. how can I start my analysis?

Answer by Dr. Simon Müller:
You may use the reshape procedure in STATA. You find an example ont the idre UCLA site:
Question #33: Event Study on CDS

Hi everyone,

I want to analyze abnormal Returns of daily CDS Prices over the past 10 years, especially at certain Events. The CDS are still collected via Bloomberg (different maturities, Senior and Sub CDS, for nearly 100 European Banks). For the estimated return I'd take an iTraxx CDS index.

Would you consider to analyze analogous to your stock return Event study examples? I doubt, that the market model will fit?

Maybe I can upload the dataset for analyzing?

Many thanks in advance,

Answer by Dr. Simon Müller:
Feel free to analyze your data with our tools. They are developed for that. If you get into trouble, please contact us per email (
Question #32: What is exactly M?

Dear Mr. Müller,

Regarding the parametric T-test for one sample Event: Could you explain me the size M (matched returns), please?

My event window is +/- seven days surrounding the announcement day of an acquisition. So L2 is 15 in my analysis, right? Is M also 15?

Thank you in advance!

You can also answer me in german.

Best wishes,

Tim Rothermel

Answer by Dr. Simon Müller:
Hi Mr. Rothermel,you are correct.Best,Simon Müller
Question #31: Grouping Variable

I am trying to run an even study test by event study tool. I found a column called grouping variable in the "request file", and in the sample file it is given as "addition". I am not quite sure what grouping variable is and what "addition" indicates. Could you kindly instruct me?

Answer by Dr. Markus Schimmer:
The purpose of the grouping variable is described as folows: "For generating the 'average' values in your analysis (i.e., AAR and CAAR values as produced by aARC), you need to specify the 'grouping variable'. If you use only one value in the grouping variable, which is the default case, AXC will calculate the average values across all events in your request file; if you choose more than one value (e.g., 'acquisition' and 'divestiture' in a boundary choise study), AXC will produce average values across the events grouped by these values." ('Addition' was a value we used in the context of a study that investigated index changes in the S&P500 index. As index changes, we considered 'additions' and 'deletions' from the index.
Question #30: Competitor Portfolio

I am examining an individual event. According to your recommendations a parametric t-test (Nr. 1 on the website) is applicable. Besides the effects this event has on the stock returns of the company responsible for the event, I'd also like to examine the effects on the firm's competitors. Treating individual competitor stocks as independet is almost surely inappropriate, since I would expect a fair amount of correlation among competitor retruns. To adjust for this possibility, I create a portfolio composed of all relevant competitors and calculated the abnormal returns of this portfolio.
1.) Can I apply the same test statistic to test for significant AR of the competitor portfolio as I do for the individual focal firm?
2.) Is there a way to avoid portfolio creation that still yields statistically meaningfull/ unbiased results? Which test would be applicable in that case?

Answer by Dr. Markus Schimmer:
Since you do a "single event"-event study, you can use the grouping variable available in our research app to group all competitors and keep the other firm separate. The tests statistics will consider the grouping as described in the test statistics section. 
Question #29: Single-Day Event Study

I am currently working on a single-day event study. I came across the paper by Kolari and Pynnönen (2010), which proposes two test statistics that can handle cross-sectional correlation: ADJ-BMP and ADJ-PATELL. Is there a way to correct for cross-sectional correlation using the "Event Study Engine"?

Answer by Dr. Simon Müller:
Yes, you may choose Adjusted Patell or Adjusted BMP test (see [5] and [7]) in our Event Study Engine. Please select there Adjusted Patell Z and Adjusted StdCSect Z.