Stock Market Responses to Economy-Wide Events

One important area of application for the event study methodology is the study of economy-wide events. In this, both the character of the 'events' studied and the research purposes vary widely in terms of the distinct research questions scholars are concerned with. Events analyzed thus include a broad range of historic occurrences, from natural disasters and economic collapse to the appointment of key personnel in politics.

The methodology is particularly trending in political research where the value of political connections during times of crisis or regulatory change has moved into the research focus. In contrast to earlier studies, which presumed that political connections mostly have implications in economies with vulnerable institutions, scholars have moved on to study the value of political interlinkages, including those in highly developed countries, such as the United States. Acemoglu et al. (2010), for example, studied the market reaction to discussions about Timothy Geithner appointment as Treasury Secretary and identified an effect similar to an emerging country behavior. Geithner-connected firms experienced a significant positive evolution, robust to a large array of tests. The research of Johnson and Mitton (2003) made the case that value of political relationships is similar in most political contexts by finding that Indonesia’s stock market path during their times of tensions (mid 1990s) was very close to the US dynamic under the present crisis.

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