A Revised Trade-to-Trade Model for All Levels of Trading Thinness in Event Studies

33 Pages Posted: 25 Aug 2010

Date Written: August 23, 2010

Abstract

This paper offers an improvement to the trade-to-trade model for event studies. While the trade-to-trade model of Maynes and Rumsey (1993) addresses the problem of thin trading by eliminating periods in which no trading is recorded, the proposed improvement addresses the influence of zero-value returns resulting from liquidity trading. This entails segmentation by the sign of company returns (positive, negative, zero). The approach allows for all levels of thinness in security trading. It is evaluated against the trade-to-trade methodology developed by Maynes and Rumsey (1993) and the Market Model using Monte Carlo simulations developed from the method of Brown and Warner (1980 and 1985). The improved trade-to-trade model is better at picking up the presence of very small levels of abnormal performance.

Keywords: Event study, thin trading, trade-to-trade model, market model, Monte Carlo simulation, rank test

JEL Classification: C15, C12, C22, C51, C52, G14

Suggested Citation

Anderson, Warwick W., A Revised Trade-to-Trade Model for All Levels of Trading Thinness in Event Studies (August 23, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663555 or http://dx.doi.org/10.2139/ssrn.1663555

Warwick W. Anderson (Contact Author)

University of Canterbury ( email )

Private Bag 4800
Christchurch
New Zealand

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