Using Cohen’s d to Measure Effect Size
Effect Size: a measure of the strength of a relationship between variables.
In domains heavily concentrated in statistics and econometrics such as financial economics, we often need to know the impact a variable has on another variable; or we may need to know the impact a group of variables has on a variable. As an example, we often need to calculate the impact GDP has on the market, or S&P 500, assuming the impact indeed holds true. In scientific terms, we refer to this impact as effect, e.g., the effect GDP has on the market. In lay terms, consider effect loosely analogous to the term strength. As another example, we may need to know the effect US spending in the energy sector has on Exxon Mobil Corporation’s stock price, XOM. We then may want to know the strength of the effect spending has on XOM, so we can gain a better understanding into how spending effects variance within XOM. In a business environment, we may want to know the effect sales has on net profit, or the effect marketing has on sales.