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Cumulative Abnormal Return (CAR) Calculator

Analyze the financial impact of an event on a stock's price using event study methodology.

Estimation Period

Event Window

Your CAR calculation will appear here.

What is Cumulative Abnormal Return (CAR)?

Cumulative Abnormal Return (CAR) is a key metric used in finance in the context of an "event study." An event study is an analysis that seeks to measure the impact of a specific event—such as an earnings announcement, a merger, or a regulatory change—on the value of a company's stock. The CAR is the sum of all the "abnormal returns" over a specific period surrounding the event. An abnormal return is the difference between the stock's actual return and its expected return if the event had not occurred. This calculator allows you to perform a simplified event study to gauge a market event's impact.

The Methodology: How CAR is Calculated

Calculating CAR is a multi-step process that compares a stock's actual performance to its expected performance.

  1. Define Periods: First, we define two timeframes: the **Estimation Period** (a period of normal trading *before* the event) and the **Event Window** (the days immediately surrounding the event).
  2. Calculate Expected Return: Using the data from the estimation period, we perform a linear regression to find the stock's relationship with the overall market. This gives us two key coefficients, Alpha (α) and Beta (β), which are used in the Capital Asset Pricing Model (CAPM). The formula for expected return on any given day is: `Expected Return = α + β * Market Return`. This tells us how the stock *should* have performed based on its historical behavior and the market's movement.
  3. Calculate Abnormal Return (AR): For each day in the event window, we find the difference between the stock's actual return and its expected return: `Abnormal Return (AR) = Actual Return - Expected Return`. A positive AR means the stock did better than expected; a negative AR means it did worse.
  4. Calculate Cumulative Abnormal Return (CAR): Finally, we sum up all the daily abnormal returns within the event window to get the CAR. This single number represents the total, cumulative impact of the event on the stock's value.

Interpreting the Results

The final CAR figure provides a powerful insight into how the market reacted to the event:

  • A **positive CAR** suggests that the market viewed the event favorably, leading to returns higher than what would have been expected.
  • A **negative CAR** suggests the market reacted negatively, causing the stock to underperform relative to its expected return.
  • A CAR **near zero** indicates that the event had little to no significant impact on the stock's value.

While this calculator provides a robust estimate, a formal academic event study would also include statistical tests to determine if the CAR is significantly different from zero. For a deeper understanding of the statistical methods, the Investopedia article on Event Studies is an excellent resource. This analysis is an advanced form of evaluating an investment's performance, which can be complemented by simpler tools like our Return on Investment (ROI) Calculator.