Wednesday, November 11, 2015

A Fascinating Event Study

I just read an absolutely fascinating event study, "The Power of the Street: Evidence from Egypt’s Arab Spring," by Daron Acemoglu, Tarek Hassan and Ahmed Tahoun (DHT). The paper is here. I'm looking forward to seeing the seminar later today.

[Abstract: During Egypt’s Arab Spring, unprecedented popular mobilization and protests brought down Hosni Mubarak’s government and ushered in an era of competition between three groups: elites associated with Mubarak’s National Democratic Party, the military, and the Islamist Muslim Brotherhood. Street protests continued to play an important role during this power struggle. We show that these protests are associated with differential stock market returns for firms connected to the three groups. Using daily variation in the number of protesters, we document that more intense protests in Tahrir Square are associated with lower stock market valuations for firms connected to the group currently in power relative to non-connected firms, but have no impact on the relative valuations of firms connected to other powerful groups. We further show that activity on social media may have played an important role in mobilizing protesters, but had no direct effect on relative valuations. According to our preferred interpretation, these events provide evidence that, under weak institutions, popular mobilization and protests have a role in restricting the ability of connected firms to capture excess rents.]

When first reading DHT, I thought the authors might be unaware of the large finance literature on event studies, since they don't cite any of it. Upon closer reading, however, I see that they repeatedly use the term "standard event study," indicating awareness coupled with a view that the methodology is now so well known as to render a citation unnecessary, along the lines of "no need to cite Student every time you report a t-statistic."

Well, perhaps, although I'm certain that most economists, even thoroughly empirical economists -- indeed even econometricians! -- have no idea what an event study is.

Anyway, here's a bit of background for those who want some.

DHT-style event studies originated in finance. The idea is to fit a benchmark return model to pre-event data, and then to examine cumulative "abnormal" returns (assessed using the model fitted pre-event) in a suitable post-event window. Large abnormal returns indicate a large causal impact of the event under study. The idea is brilliant in its simplicity and power.

Like so many things in empirical finance, event studies trace to Gene Fama (in this case, with several other luminaries):

The adjustment of stock prices to new information
EF Fama, L Fisher, MC Jensen, R Roll - International economic review, 1969 - JSTOR

THERE IS an impressive body
of empirical evidence which indicates that successive price
changes in individual common stocks are very nearly independent. 2 Recent papers by
Mandelbrot [11] and Samuelson [16] show rigorously that independence of successive ...

For surveys, see:

The econometrics of event studies

Abstract: The number of published event studies exceeds 500, and the literature continues
to grow. We provide an overview of event study methods. Short-horizon methods are quite
reliable. While long-horizon methods have improved, serious limitations remain. A ...
Cited by 824 Related articles All 14 versions Cite Save More

Event studies in economics and finance

AC MacKinlay - Journal of economic literature, 1997
ECONOMISTS are frequently asked to measure the effects of an economic event on the 
value of firms. On the surface this seems like a difficult task, but a measure can be constructed easily using an event study. Using financial market data, an event study ...Cited by 3290 Related articles All 27 versions Web of Science: 499 Cite Save More
(Not much has changed since 2004, or for that matter, since 1997.)