Long-run stock return and the statistical inference

Abstract

This article introduces the long-run stock return methodologies and their statistical inference. The long-run stock return is usually computed by using a holding strategy more than 1 year but up to 5 years. Two categories of long-run return methods are illustrated in this article: the event-time approach and calendar-time approach. The event-time approach includes cumulative abnormal return, buy-and-hold abnormal return, and abnormal returns around earnings announcements. In former two methods, it is recommended to apply the empirical distribution (from the bootstrapping method) to examine the statistical inference, whereas the last one uses classical t-test. In addition, the benchmark selections in the long-run return literature are introduced. Moreover, the calendar-time approach contains mean monthly abnormal return, factor models, and Ibbotson’s