An Event Long-Short Index: theory and applications
Files
Accepted manuscript
Dataset
Date
2019-12-01
Authors
Fisman, Raymond
Zitzewitz, Eric
Version
Accepted manuscript
OA Version
Citation
Raymond Fisman, Eric Zitzewitz. 2019. "An Event Long-Short Index." American Economic Review: Insights, Vol. 1, No. 3. pp. 357-372. https://doi.org/10.1257/aeri.20180399
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.