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Measuring Abnormal Bond Performance

Hendrik Bessembinder

Arizona State University

Kathleen M. Kahle

University of Arizona - Department of Finance

William F. Maxwell

SMU - Cox School

Danielle Xu

Gonzaga University

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, G14

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Date posted: January 19, 2005 ; Last revised: July 17, 2008

Suggested Citation

Bessembinder, Hendrik and Kahle, Kathleen M. and Maxwell, William F. and Xu, Danielle, Measuring Abnormal Bond Performance. Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=650883 or http://dx.doi.org/10.2139/ssrn.650883

Contact Information

Hendrik (Hank) Bessembinder
Arizona State University ( email )
PO Box 873906
Tempe, AZ 85207
United States
Kathleen M. Kahle
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)
William F. Maxwell (Contact Author)
SMU - Cox School ( email )
Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States
Danielle Xu
Gonzaga University ( email )
Spokane, WA 99258
United States
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