Tuesday, June 25, 2019

“What Were the Odds? Estimating the Effect of Policy Shocks on Energy Firms”
Ashley Langer (University of Arizona)
Joint with Derek Lemoine (University of Arizona)


The event study methodology is widely used in economics and finance to estimate the market consequences of news. However, event studies cannot recover the full effects of events that the market anticipated might happen. We overcome this widely known limitation by developing two non-parametric methods for recovering the market’s priced-in probability of events from the prices of widely traded financial options. These methods involve running event studies in options prices to complement the standard event study in stock prices. We demonstrate the power of our new methods through applications to events such as the 2016 Presidential election and OPEC meetings, where we can recover both the market’s prediction of the probability of the event outcome and the full effect of the event on firms.

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