From last year’s exam, Question 1.
Part I
Many financial analysts provide information to investors whether it is interesting to buy
or sell stocks. On Dutch television there is a show called ‘Business Class’ in which a
variety of these financial analysts provide such information.
Recently, academic studies have appeared that investigated whether the advice of
financial analysts result in (extra) profits for (individual) investors. You are interested
whether stock markets react to the advices that are given by the analysts on the show
‘Business Class’.
a) When conducting an event study to answer the question whether stock markets
react to the advices that are given by the analysts on the show ‘Business Class’,
what are the steps you need make?
b) How do you define cumulative average abnormal returns (CAR)? In what way are
they relevant to answer the research question?
c) The financial analysts typically give advice about several stocks in the same
episode of the show. Explain why this clustering of advices may lead to problems
in the testing of significance of the CAR. Also, discuss how one can solve these
problems.
Part II
In case of the linear model without an intercept and two group dummies,
yi = β1d1i + β 2 d 2i + ε i
where each individual i belongs to either group 1 (d1i=1 and d2i=0) or group 2 (d1i=0 and
d2i=1).
d) Explain why this regression model cannot contain an intercept
e) Show that the OLS estimators of the coefficients of the dummy variables equal
the sample mean of the dependent variable in each of the two groups.
Part I
Many financial analysts provide information to investors whether it is interesting to buy
or sell stocks. On Dutch television there is a show called ‘Business Class’ in which a
variety of these financial analysts provide such information.
Recently, academic studies have appeared that investigated whether the advice of
financial analysts result in (extra) profits for (individual) investors. You are interested
whether stock markets react to the advices that are given by the analysts on the show
‘Business Class’.
a) When conducting an event study to answer the question whether stock markets
react to the advices that are given by the analysts on the show ‘Business Class’,
what are the steps you need make?
b) How do you define cumulative average abnormal returns (CAR)? In what way are
they relevant to answer the research question?
c) The financial analysts typically give advice about several stocks in the same
episode of the show. Explain why this clustering of advices may lead to problems
in the testing of significance of the CAR. Also, discuss how one can solve these
problems.
Part II
In case of the linear model without an intercept and two group dummies,
yi = β1d1i + β 2 d 2i + ε i
where each individual i belongs to either group 1 (d1i=1 and d2i=0) or group 2 (d1i=0 and
d2i=1).
d) Explain why this regression model cannot contain an intercept
e) Show that the OLS estimators of the coefficients of the dummy variables equal
the sample mean of the dependent variable in each of the two groups.
