I am doing my research related to IPOs long term performance. For the BHAR formula, I just want to clarify the formula is that always compare with the first trading day price, or is compared with last month trading price?

For example, (always compare with month 1) [(Month 2/Month 1) x (Month 3/Month 1) x (Month 4/Month 1)] - [(index Month 2/index Month 1) x (index Month 3/index Month 1) x (index Month 4/index Month 1)]

or compared with last month trading price [(Month 2/Month 1) x (Month 3/Month 2) x (Month 4/Month 3)] - [(index Month 2/index Month 1) x (index Month 3/index Month 2) x (index Month 4/index Month 3)]

simply, I calculated 1+Rit (a) and (b), which one is the correct one used in BHAR formula?

BHARi(t, T) = Πt = 1 to T (1 + Ri,t) - Π t = 1 to T (1 + RB,t)

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1 Answer 1


Welcome to Quantitative Finance!

I reckon the BHAR (Buy-and-Hold Abnormal Returns) formula you are referring to is

$$\text{BHAR}_{i,h} = \prod_{t=1}^{h}(1+R_{i,t}) - \prod_{t=1}^{h}(1+R_{m,t})$$

where $\text{BHAR}_{i,h}$ is the abnormal return of the asset $i$ over the period $h$, $R_{i,t}$ is the month $t$ simple return of the asset $i$, and $R_{m,t}$ is the month $t$ simple return of the benchmark portfolio or index $m$, and you are specifically enquiring about the first part of the right-hand side of the above equation.

Then, the answer to your question is the second formula in your post (the one in the paragraph starting with “or compared”) which, curiously, seems to be related rather to the first set of calculations (those in the column whose heading is “1+Rit (a)”) in the table in your post.

On another note, if you are planning to ask (or answer) more questions including formulas on the Internet, I recommend that you learn MathJax, which is basically LaTeX for the Internet. You are more likely to get (better) answers if the formulas, if any, in your questions are easily comprehensible. You can start with this YouTube video if you like. The MathType software mentioned in that video is a bit like a tricycle: it helps an absolute beginner start using MathJax immediately. And once you learn MathJax further, you may find this practical but rich and detailed reference on Math Stack Exchange to be quite helpful.


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