Working Paper: NBER ID: w28265
Authors: Ashley Langer; Derek Lemoine
Abstract: An event study generates only a lower bound on the full effect of an event unless researchers know the probability that investors assigned to the event before it occurred. We develop two model-free methods for recovering the market’s priced-in probability of events. These methods require running event studies in financial options to complement the standard event study in stock prices. Validating both approaches, we estimate that the 2016 U.S. election outcome had a 12% chance of occurring. This probability is consistent with contemporary polling, bookmaker, and prediction market estimates. Demonstrating the usefulness of our approaches, we show that many OPEC meetings’ outcomes were well-anticipated. OPEC retained substantial influence on world oil prices even as the U.S. increased oil production.
Keywords: No keywords provided
JEL Codes: C58; G13; L71; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Methods for estimating the priced-in probability of uncertain events (C13) | Market's anticipatory behavior regarding these events (D84) |
| Market pricing (D49) | Event probabilities (C25) |
| OPEC meetings outcomes (Q38) | World oil prices (Q31) |
| Event studies on financial options (G14) | Understanding of market expectations (D84) |
| Stock prices (G19) | Empirical evidence of actual outcomes (C90) |