Bond Market Event Study Methods

47 Pages Posted: 20 Jul 2012 Last revised: 11 Nov 2013

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Wei Guan

University of South Florida St. Petersburg

Lisa Yang

Montana State University - Bozeman

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2013

Abstract

Issues in the construction of corporate bond event studies using bond transaction data are explored. We show that the procedures used in studies to date have relatively low power because they fail to control for the substantial heteroskedasticity in bond returns due to differences in term-to-maturity, rating, and other characteristics. Standardization of bond returns by their estimated volatility leads to much more powerful tests. We further find that due to infrequent trading, use of transaction price observations over several days before and after an event, while giving more weight to returns calculated from transactions closest to the event, yields considerably more powerful tests than returns based solely on transactions the day before and day after the event (while also increasing coverage of small firms). We also explore how test power depends on which trades are included and how transaction prices are weighted in calculating daily prices, and on how individual bond returns are weighted in calculating firm returns. As an example of the power improvement our suggestions yield, the likelihood of detecting a fifteen basis point event impacting 300 firms using the t-test rises from approximately 24% for the best current state-of-the art procedure to 84% following our suggested procedures.

Keywords: event studies, bonds, financial econometrics

JEL Classification: G14, C1, G10

Suggested Citation

Ederington, Louis H. and Guan, Wei and Yang, Lisa, Bond Market Event Study Methods (November 10, 2013). Available at SSRN: https://ssrn.com/abstract=2113087 or http://dx.doi.org/10.2139/ssrn.2113087

Louis H. Ederington (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Wei Guan

University of South Florida St. Petersburg ( email )

College of Business
140 Seventh Avenue South
St. Petersburg, FL 33701-5016
United States
(727) 873-4945 (Phone)
(727) 873-4192 (Fax)

Lisa Yang

Montana State University - Bozeman ( email )

Bozeman, MT 59717-2920
United States

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