What Were the Odds? Estimating the Market's Probability of Uncertain Events∗ Ashley Langery and Derek Lemoinez PRELIMINARY AND INCOMPLETE. April 26, 2019 The event study methodology is widely used in economics and finance to es- timate the market consequences of news. However, event studies cannot recover the full effects of events that the market anticipated might happen. We overcome this widely known limitation by developing two nonparametric methods for recov- ering the market's priced-in probability of events from the prices of widely traded financial options. These methods involve running event studies on options prices to complement the standard event study in stock prices. We demonstrate the power of our new methods through applications to prominent events in health care regulation: we recover probabilities for two elections, a court case, and a legislative event that are consistent with available evidence such as polling data and prediction markets. These probabilities suggest that a conventional event study would draw incorrect conclusions about which events were most consequential for firms. JEL: C58, G13, I11, I18 Keywords: event study, anticipation, policy uncertainty, options, derivatives, health care, Affordable Care Act ∗We are grateful to David Card, Gautam Gowrisankaran, Todd Sorensen, and Tiemen Woutersen for discussions and feedback, to the University of Arizona's Eller Center for Management Innovations in Healthcare and Institute of the Environment for financial support, and to Wendan Zhang for excellent research assistance. yUniversity of Arizona;
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[email protected] Langer and Lemoine Draft: Estimating Event Probabilities April 26, 2019 1 Introduction The event study methodology measures the consequences of news for firms’ stock prices.