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Methodology for Emh

In: Business and Management

Submitted By raghavrastogi
Words 1337
Pages 6
1. Methodology
1.1 Impact of Buy and Sell Recommendations
We examined the effect of Barrons’ buy, sell and hold recommendations on stock prices, using the Brown and Warner (1985) standard event-study method to compute the daily abnormal returns. We used a two-step procedure to compute the average daily abnormal returns with stock price data from CRSP.
First, we estimated the alpha and beta coefficients of each firm by using a single-factor market model. We used the days from –301 to –46 as the estimation window for this purpose. Second, we computed the abnormal return by subtracting a firm’s expected daily return from its observed return. We calculated the cumulative abnormal returns by adding up the abnormal returns over the periods from days -30 to 0, days -5 to 0, days 0 to 1, days 0 to 5, and days 2 to 30, where day 0 represents the next trading day following the Saturday when the Barrons’ recommendation was published. These abnormal returns are estimated for buy, sell and hold recommendations.

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1.2 Portfolio Performance
In order to evaluate the average performance of recommendations published by Barrons we assembled a Barrons portfolio by equally weighting their recommendations for 374 days starting January 3, 2012 till June 28, 2013. We used two approaches to do this.
First, we added a new security into the portfolio whenever there was a buy recommendation published for it in Barrons. The security remained in the portfolio for 6 months if there was no subsequent buy or hold recommendation during this period. If Barrons published another buy or hold recommendation on this security during the 6 month period then the stock remained in the portfolio for an additional 6 month period starting on the date when the recommendation was published. A security was removed from the portfolio if it had remained in

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