INSTRUCTIONS FOR CALCULATING ABNORMAL RETURN

STEPS INSTRUCTIONS

1 Choose an Australian company for which abnormal return has to be calculated (e.g. The Warehouse Ltd)

2 Identify the day for which you will calculate the abnormal return (e.g. 26 Feb 2010 for The Warehouse Ltd)

3 Download share price for around 300 days of trading from any period from 26 Feb 2010, over the last 12 months in the past. You can download

data from Yahoo Finance.

4 Download an appropriate index (AllOrd or industry index) data for Australian market for the same period as your company share price (i.e. 300

days). You can download data from Yahoo Finance.

5 Calculate share return for the company for 300 trading days. Share return is calculated using a simple formula:

Rit = (Pt - P t-1)/P t-1

6 Calculate index return for the Australian index for 300 trading days. Index return is calculated using a simple formula:

Rmt = (Mt - Mt-1) / Mt-1

7 Copy and paste the index return and company return for 300 days on a single excel spreadsheet

8 Run a univariate regression with company return (for 250 days) as the dependent variable (Y variable) and market index return as the

independent variable (X variable). In excel we have an option for data analysis in the menu bar. Choose REGRESSION ANALYSIS from the

list. When you click on regression a window will pop up. In that window you have the option of selecting the x variable and y variable and

output range (the location where you want the data).

9 Estimate beta using up to 250 days of trading for the company (e.g. The Warehouse Ltd) using standard market model regression.

Equation is estimated for a company over a period of up to 250 days (but not less than 100 days) through to 10 days before the event date (e.g.

26th February 2010). This procedure ensures that the estimates of the model parameters for testing events are not influenced by the event itself.

This is done automatically when you click on OK in the window.

10 From the regression output table you need only two pieces of data, the coefficient for intercept and the coefficient for X variable. Insert the

coefficient values in the abnormal return formula to calculate abnormal return for 26th

Feb 2010 for The Warehouse Ltd. The formula is:

a0 = intercept coefficient The Warehouse Ltd abnormal return on 26 Feb -0.08457 = -0.0828 – (0.00092 + 0.11335*0.00784)

b1= X variable coefficient

itmtit RR 10

)( 10 mtitit RbaRAR