Zero-Value Company Returns, Thin Trading and the Use of State Asset Pricing Models in Event Study Research

29 Pages Posted: 25 Aug 2009

Date Written: August 23, 2009

Abstract

The calculation of expected returns is a necessary ingredient in data processing for an event study. The method most commonly used, the market model, often fails to meet the OLS requirement of normally distributed residuals, and tends to furnish regression output (low R2, and insignificant t- and F-statistics) that, in other contexts, one would not rely on. A family of state asset pricing models may offer improved performance in this respect. This issue becomes important when a listed company’s stocks are thinly traded and missing data is proxied by zero-value returns whose rate of occurrence impacts on the ability of the market model to cope. A 3-state asset pricing model has superior performance characteristics when applied to thinly-traded data sets.

Keywords: state asset pricing models, alternative methods, thin trading, expectations models, event study

JEL Classification: G14, G19

Suggested Citation

Anderson, Warwick W., Zero-Value Company Returns, Thin Trading and the Use of State Asset Pricing Models in Event Study Research (August 23, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1460347 or http://dx.doi.org/10.2139/ssrn.1460347

Warwick W. Anderson (Contact Author)

University of Canterbury ( email )

Private Bag 4800
Christchurch
New Zealand

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