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Bond market event study methods

Author

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  • Ederington, Louis
  • Guan, Wei
  • Yang, Lisa (Zongfei)

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.

Suggested Citation

  • Ederington, Louis & Guan, Wei & Yang, Lisa (Zongfei), 2015. "Bond market event study methods," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 281-293.
    • Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:281-293
    DOI: 10.1016/j.jbankfin.2015.03.013
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    More about this item

    Keywords

    Event studies; Bonds; Financial econometrics;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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