Overview

With the earnings date, the windows, and the market model fixed, the measurement is a residual. This topic builds that residual on the event window, sums it into a cumulative abnormal return, and sets the sum next to a buy-and-hold gap that compounds gross returns. It then withdraws the usual variance formula when two firms' windows share a calendar day. Averaging rules that assume independence are stated here and stress-tested in the dependence topic.

By the end of this note you should be able to:

• compute a market-model abnormal return from $\hat\alpha$, $\hat\beta$, and the day's market return;
• form a CAR, and a BHAR from the same monthly returns, and see that they differ by compounding;
• identify an overlapping pair of event windows and the variance term the overlap invalidates.

1. Contents
2. The big picture