Bond Market Event Studies

Louis Ederington, Michael F Price Chair in Finance, University of Oklahoma & Lisa Yang, PhD Candidate, University of Oklahoma
2013 FMA Annual Meeting Tutorial Presentation
The availability of new corporate bond databases, such as TRACE, raises the prospect of conducting the same sort of event studies for corporate debt that have become ubiquitous for equity markets. However, normal stock market event study methods do not translate well to bond markets because the researcher faces hurdles which are either not present in the equity market or are much less serious there.
First, there are a number of challenges in merging TRACE data with CRSP and COMPUSTAT. Second both between and within firms, bonds differ by time-to-maturity, rating and other characteristics leading to serious heteroskedasticity. Third, bonds trade infrequently; on an average day more bonds do not trade than trade.
Ederington and Yang discuss solutions to these problems and suggest procedures for constructing powerful tests.