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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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    References listed on IDEAS

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    Cited by:

    1. Maul, D. & Schiereck, D., 2016. "The bond event study methodology since 1974," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 80723, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Chen, Fan, 2016. "The wealth effects of dividend announcements on bondholders: New evidence from the over-the-counter market," Journal of Economics and Business, Elsevier, vol. 86(C), pages 52-75.
    3. repec:eee:finana:v:52:y:2017:i:c:p:203-212 is not listed on IDEAS
    4. Luc Renneboog & Peter G. Szilagyi & Cara Vansteenkiste, 2017. "Creditor rights, claims enforcement, and bond performance in mergers and acquisitions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 174-194, February.
    5. repec:eee:quaeco:v:66:y:2017:i:c:p:328-344 is not listed on IDEAS
    6. repec:eee:jbfina:v:90:y:2018:i:c:p:146-158 is not listed on IDEAS
    7. Drago, Danilo & Gallo, Raffaele, 2016. "The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 264-286.
    8. Zhang, Zhichao & Li, He & Zhang, Chuanjie, 2017. "Oral intervention in China: Efficacy of Chinese exchange rate communications," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 24-34.

    More about this item

    Keywords

    Event studies; Bonds; Financial econometrics;

    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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