Abnormal return

In finance, an abnormal return is the difference between the actual return of a security and the expected return. Abnormal returns are sometimes triggered by “events.” Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all of which can contribute to an abnormal return. Events in finance can typically be classified as information or occurrences that have not already been priced by the market.

Stock market

In stock market trading, abnormal returns are the differences between a single stock or portfolio’s performance and the expected return over a set period of time.[1] Usually a broad index, such as the S&P 500 or a national index like the Nikkei 225, is used as a benchmark to determine the expected return. For example, if a stock increased by 5% because of some news that affected the stock price, but the average market only increased by 3% and the stock has a beta of 1, then the abnormal return was 2% (5% – 3% = 2%). If the market average performs better (after adjusting for beta) than the individual stock, then the abnormal return will be negative.

{\displaystyle {\textrm {Abnormal}}\ {\textrm {Return}}={\textrm {Actual}}\ {\textrm {Return}}-{\textrm {Expected}}\ {\textrm {Return}}}Cumulative abnormal return

Cumulative abnormal return, or CAR, is the sum of all abnormal returns.[4] Cumulative Abnormal Returns are usually calculated over small windows, often only days. This is because evidence has shown that compounding daily abnormal returns can create bias in the results.[5]


  1. ^“Definition of Abnormal Returns”. About.com – Economics. Archived from the original on 17 September 2008. Retrieved 7 August 2008.
  2. ^ Jump up to:ab Szutowski, Dawid (2016). Innovation and Market Value. The Case of Tourism Enterprises. Difin. p. 153. ISBN 9788380852471.
  3. ^McWilliams, A., Siegel, D. (1997). “Event Studies in Management Research: Theoretical and Empirical Issues”. Academy of Management Journal. 40 (3): 626–657. doi:10.2307/257056. JSTOR 257056.
  4. ^Trading-Glossary Cumulative abnormal return (CAR) Retrieved on July 18, 2007
  5. ^Brown, Stephen; Warner, Jerold (1985). “Using daily stock returns: the case of event studies”. Journal of Financial Economics. 14: 3–31. doi:10.1016/0304-405x(85)90042-x.

Ofer Abarbanel – Executive Profile

Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library