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Bond market event study methods

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

Journal of Banking & Finance, 2015, vol. 58, issue C, 281-293

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 (search for similar items in EconPapers)
JEL-codes: G14 C1 G10 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:281-293