REALIZED VOLATILITY AND ACQUISITIONS Sean Puneky 25 February 2009
A New Focus I’ve decided to focus more on acquisition analysis as narrowing down which dates to study for an ad campaign involves too much guesswork Have been reading papers on event study methodology
What I’ve been reading Event-study methodology under conditions of event- induced variance (Boehmer, Musumeci, Poulsen, 1991) Volatility Clustering and Event-induced Volatility: Evidence from UK M&A (Balaban, Constantinou, 2006) Divergence of Opinion and Post-Acquisition Performance (Alexandridis, Antoniou, Petmezas, 2007)
Theory Announcement of a merger should have a significant effect on the Realized Volatility of a stock Realized Volatility might be effected differently if the merger is announced over the weekend vs. during the week vs. during the trading day
The Puneky Index® Complied from twenty-seven stocks in the S&P 100, three stocks from each sector of the economy Attempted to choose the three stocks in each sector from three different industries but that wasn’t always possible Available data runs from: April 4 th, 1997 through December 31 st, 2008
The Puneky Index® Basic MaterialsALCOAExxon MobilDow Chemical ConglomeratesGeneral Electric3MUnited Technologies Consumer GoodsP&GFord MotorsCoca-Cola FinancialAmerican ExpressJPMWells Fargo HealthcareJ&JMedtronicAmgen Industrial GoodsCaterpillarBoeingHoneywell ServicesWalt DisneyFedExWal-Mart Stores TechnologyIBMAT&TMicrosoft UtilitiesSouthern CompanyExelonEntergy
Returns: The Puneky Index®
S&P 500 Returns
Pindex: Annualized RV (8min)
Statistical Comparison: Pindex and S&P500 StatisticPindexS&P 500 Mean of Returns e e-005 Volatility of Returns Conclusion: The Pindex is a somewhat valid proxy for the S&P500
Microsoft Analysis Test whether or not announcement of acquisitions by Microsoft in the year 2007 had a significant impact on realized volatility Methodology: Regress “MSFT log(RV) – Index log(RV)” on binary variable containing whether or not an acquisition was announced on that day
Data Of 247 total observations, the binary variable was “True” only 12 times Acquisitions range in size from small software makers to multi-billion dollar deals All acquisitions, no matter the scope, were treated the same
STATA Regression regress diff binary Source | SS df MS Number of obs = F( 1, 245) = 0.02 Model | Prob > F = Residual | R-squared = Adj R-squared = Total | Root MSE = diff | Coef. Std. Err. t P>|t| [95% Conf. Interval] binary | _cons |
Conclusions The binary variable is clearly not significant Many sources of error here In future, I will attempt to use either only large or only small acquisitions or add a variable for acquisition size I also want to extend study to other stocks or time periods
Extensions Need to research more common methodologies for this type of study Expand to other equities, and perhaps bring in returns