By Megan Czasonis, Mark Kritzman, and David Turkington
We measure investment returns based on the passage of meaningful events rather than just counting the days.
From a calendar perspective, every day or month is the same as any other day or month. However, from an event perspective, some periods are more meaningful than others. For example, we arguably experienced more in the Covid-induced upheaval of March 2020 than we do in most years. For investors, meaningful events are important, because they may cause asset prices to change. Based on this intuition, we explore the implications of measuring asset performance over periods with equal event intensity, a new clock that we call event time. Compared to traditional calendar returns, we find that event returns are better behaved in two key ways: (1) individual asset returns more closely resemble normal distributions and (2) co-movements between asset returns are more stable. These enhanced properties can help investors improve stress testing, performance evaluation, portfolio construction, and more.