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N.V. Abdullayeva: Value creation through mergers and acquisitions in energy sector
and transaction value. In further chapters, we will cover in depth the criteria employed
when screening the companies in our sample.
3. Select the performance model to measure abnormal returns
4. Calculate normal (non event) and abnormal events returns through time for
every security
5. Identify statistical significance of ARs and CARs
Several models can be used to measure abnormal returns including factor model,
market model, and capital asset pricing model (CAPM). In our research, we use
market model suggested by MacKinlay (1997) to calculate abnormal returns.
Statistical relationship between the return on company‘s share and the return on
the market portfolio may be determined by employing market model. The model
was suggested by Markowitz (1959) and enhanced by Sharpe (1963) to easy
problems related with selection of portfolio by investors, economists and etc.
In stable economic conditions, the stock prices move along with the market on a
daily basis based on its performance. Event study uses market model to determine how
certain announcements or events impact stock price, capturing the statistical errors in
estimates of historical relationship between security and market. According to Fama
(1976) if assumption of bivariate normality holds then expected return of a given
security conditional on some value of return on the market is a linear function. In other
words the variance of the financial return of certain security subject to expected market
return is the same for each value of expected return on security.
The market model can be stated as: (MacKinlay , 1997)
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