Bond Market Event Study Methods

46 Pages Posted: 24 Jun 2015

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: June 23, 2015

Abstract

The procedures used in corporate bond event studies to date fail to control for heteroskedasticity due to differences in return volatility by term-to-maturity, rating, and other factors resulting in low test power. Bond return standardization yields considerably more powerful tests. Also, due to infrequent trading, use of bond transaction price observations over several days before and after an event, while giving more weight to returns calculated from transactions closer to the event, yields considerably more powerful tests than returns based solely on transactions the day before and the day after the event. Exploring the test bias caused by overlapping event dates, we find that, adjusted for rating and maturity, the correlation among standardized abnormal bond returns is small but that even fairly small correlations can result in biased test statistics. A bond market modification of the Kolari and Pynnönen (2010) procedure corrects this bias.

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 (June 23, 2015). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2622040

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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