Data The provided data consists of three different files: - The file sp500inclusions contains information about when the stock of a company was included in the S&P 500 index. Permno is a stock security identifier that can be used to match files. Dateann refers to the date when Standard&Poor’s announced the inclusion of new stock and Dateeff to the date when the stock was actually included (usually a few days later). - The file sp500stockret contains stock returns for each stock in sp500inclusions. The sample covers the period starting 1 year prior to Dateann until 1 year after Dateeff. - The file sp500marketret contains the index return of the S&P 500 (sprtrn), which serves as a proxy for the market return, as well as the yield on short-term US government debt (rf), which serves as a proxy for the risk-free rate.
1. For each stock estimate pre and post-inclusion betas. For pre-inclusion betas use 1 year of stock returns until 10 days prior to the inclusion announcement. For post-inclusion betas use 1 year of stock returns starting 10 days after effective inclusion. You will use these betas in step 3 to compute abnormal returns. (In case you are not able to estimate these betas, continue with step 2 and use in your analysis simple excess returns, i.e. stock returns minus the S&P 500 index return.)
2. Compute abnormal stock returns based on the CAPM.
3. Starting 10 trading days prior to an inclusion announcement, compute cumulative abnormal returns (CARs). To get the CAR of stock XY 10 days after inclusion announcement, for example, you have to sum up all abnormal returns from 10 days prior to announcement until 10 days after the announcement. Hint: you may want to create an event time variable that takes the value zero for the announcement date.
4. Produce a so-called event study graph starting 10 trading days prior to the inclusion announcement. Plot the average of CARs overall stocks for each point in event time.
For the graph use the event time from -10 to +20 trading days. Describe your graph and interpret the evidence.
5. Report a table of summary statistics for all variables of interest. Report mean, median, standard deviation, minimum, maximum, and no of observations.
6. Provide statistical tests on whether abnormal returns on the announcement date and the effective inclusion date are statistically significant. Also, test CARs 20 and 50 trading days after effective inclusion.
7. Test whether pre- and post-inclusion betas are different? Describe your result and interpret the evidence.
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