Cumulative Abnormal Return, or CAR, is a financial metric used to measure the total abnormal return generated by a security over a specific event window. It is calculated by summing up daily abnormal returns, which represent the difference between the actual return and the expected return predicted by a market model such as the Capital Asset Pricing Model. CAR is widely used in event studies within financial economics to assess how corporate announcements, mergers, earnings reports, and regulatory changes affect stock prices. A positive CAR indicates an event had a favorable market impact.
The cumulative abnormal return calculation involves estimating the normal return using a benchmark period prior to the event, then measuring excess returns during the event window. Researchers use statistical significance testing to determine whether CAR deviates meaningfully from zero. This methodology helps isolate the effect of a specific event from broader market movements. CAR analysis is standard in academic finance research and is also used by investment banks and hedge funds for post-event performance evaluation. Software tools like SAS, Stata, and Python libraries facilitate CAR calculations for large datasets. Understanding CAR helps investors and analysts evaluate the true market reaction to significant corporate or macroeconomic events.