Title: On the market model as a counterfactual for event studies in finance
Authors: Carlos Castro - Universidad del Rosario (Colombia) [presenting]
Abstract: A common framework is provided that relates traditional event study estimation methods in finance to a modern approach for causal event studies. The framework provides a model for abnormal returns that nest the market model (the traditional approach) and more recent approaches based on difference-in-differences and synthetic control methods. We show that a synthetic control method in this context can be understood as a synthetic portfolio. We provide a simulation exercise and an empirical application, using mergers and acquisitions as the event of interest, to evaluate the performance of the different models within the framework. The results indicate that the performance of the market model, as a good counterfactual, depends on the distribution of the weights of the index, which is unfortunately overlooked in many empirical applications.