Hi Statalist members,
I am currently undertaking an financial market event study using Stata. My
data file has variables for company id, date, eventdate, return and market
return. I am using the guide posted at the link below for some background:
http://dss.princeton.edu/usingdata/stata/analysis/eventstudy.html
In this formulation, normal returns are calculated using the standard market
model (5 day event window and 30 day estimation window). I wish to implement
a similar event study however using a GARCH(1,1) process to generate
'normal' returns. In order to facilitate this approach, is it just a matter
of swapping the line:
reg ret market_return if id==`i' & estimation_window==1
with
arch ret market_return if id==`i' & estimation_window==1, arch(1) garch(1)
Will the 'predict' function make an appropriate prediction of the stock
return conditional on returns exhibiting GARCH(1,1) attributes? For your
information the code I am basing my event study on is displayed below.
Thank-you very much for any help you may be able to offer.
Regards,
Ronan
sort company_id date
by company_id: gen datenum=_n
by company_id: gen target=datenum if date==event_date
egen td=min(target), by(company_id)
drop target
gen dif=datenum-td
by company_id: gen event_window=1 if dif>=-2 & dif<=2
egen count_event_obs=count(event_window), by(company_id)
by company_id: gen estimation_window=1 if dif<-30 & dif>=-60
egen count_est_obs=count(estimation_window), by(company_id)
replace event_window=0 if event_window==.
replace estimation_window=0 if estimation_window==.
set more off
gen predicted_return=.
egen id=group(company_id)
forvalues i=1(1)N { /*note: N is replaced by the number of events, in my
case 127 */
l id company_id if id==`i' & dif==0
reg ret market_return if id==`i' & estimation_window==1
predict p if id==`i'
replace predicted_return = p if id==`i' & event_window==1
drop p
}
sort id date
gen abnormal_return=ret-predicted_return if event_window==1
by id: egen cumulative_abnormal_return = sum(abnormal_return)
sort id date
by id: egen ar_sd = sd(abnormal_return)
gen test =(1/sqrt(5)) * ( cumulative_abnormal_return /ar_sd)
list company_id cumulative_abnormal_return test if dif==0
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