Measuring Security Price Performance Essay (Critical Writing)

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There are quite a number of firm specific events that impact the stock market. Brown and Warner (237) are emphatic that event studies assist the interested parties in understanding factors that affect the pricing of securities in the stock market. At this point, it is necessary to mention that firms across the stock market are hardly affected in the same way when it comes to the pricing of securities. Perhaps, this explains why the discipline on event studies should be given priority by officials who analyze securities at the stock market.

The observed stock return is an important entity in the stock market analysis. It is not surprising that Brown and Warner (211) have used this methodology in the paper so that they can be in a position to accurately measure the performance of securities in terms of market price.

In order to obtain the most precise results from the measurement, it is usually necessary to introduce abnormal performance in the statistics to be analyzed. When the latter procedure is followed, it is quite easy to track down the methodology due to its simplicity. If the available data is subjected to various marketing conditions, it is found out that an impressive performance is recorded under the given market model. However, simpler methods may not perform better than the market model due to internal factors that drive changes in the stock market.

Finally, the adopted methodologies should be used well bearing in mind that false deductions may be made regarding the performance of the stock market. Worse still, it can be cumbersome to detect abnormal performance if the methodologies used are not correct. This scenario has been extensively discussed by Brown and Warner in their article (221).

Reference:

Brown, Stephen and Jerold, Warner. Measuring Security Price Performance. Journal of Financial Economics 8 (1980): 205-258. Print.

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