An Event Long-Short Index: Theory and Applications

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. (JEL D22, D72, D83, G14, L25)

The Global Impact of Brexit Uncertainty

“…Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019). 21 Figure 8 shows a binned added-variable plot of firm-level capital investment (I i,t+1 /K i,t ) 21 Bloom et al (2019) points out that Brexit presents a persistent uncertainty shock that should have a heterogeneous impact on UK firms; the impact depends on firms' prior exposure to the EU.…”

The Global Impact of Brexit Uncertainty

“…Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019). 21 Figure 8 shows a binned added-variable plot of firm-level capital investment (…”

The Global Impact of Brexit Uncertainty

“…Furthermore, recent developments in the literature have highlighted that first and second moment shocks can appear together, either amplifying or confounding each other (Bloom et al, 2018;Berger et al, 2017;Hassan et al, 2019). We examine these predictions in the context of Brexit, which (it has been argued) represents an "almost ideal" uncertainty shock inasmuch as it was large, unanticipated, and delayed in implementation (Fisman and Zitzewitz, 2019;Born et al, 2019). 21 Figure 8 shows a binned added-variable plot of firm-level capital investment (…”