Measuring Abnormal Bond Performance
University of Utah - Department of Finance
Kathleen M. Kahle
University of Arizona - Department of Finance
William F. Maxwell
SMU - Cox School
Review of Financial Studies, Forthcoming
We analyze the empirical power and specification of test statistics designed to detect abnormal bond returns in corporate event studies, using monthly and daily data. We find that test statistics based on frequently used methods of calculating abnormal monthly bond returns are biased. Most methods implemented in monthly data also lack power to detect abnormal returns. We also consider unique issues arising when using the newly available TRACE data, and formulate and test methods to calculate daily abnormal bond returns. Using daily bond data significantly increases the power of the tests, relative to the monthly data. Weighting individual trades by size while eliminating non-institutional trades from the TRACE data also increases the power of the tests to detect abnormal performance, relative to using all trades or the last price of the day. Further, value-weighted portfolio matching approaches are better specified and more powerful than equal-weighted approaches. Finally, we examine abnormal bond returns to acquirers around mergers and acquisitions to demonstrate how the abnormal return model and use of daily versus monthly data can affect inferences.
Number of Pages in PDF File: 53
Keywords: event study, bond returns, TRACE
JEL Classification: G12, G14working papers series
Date posted: January 19, 2005 ; Last revised: July 17, 2008
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