Measuring abnormal bond performance

Hendrik Bessembinder, Kathleen M. Kahle, William F. Maxwell, Danielle Xu

Research output: Contribution to journalArticle

160 Citations (Scopus)

Abstract

We analyze the empirical power and specification of test statistics designed to detect abnormal bond returns in corporate event studies, using monthly and daily data. We find that test statistics based on frequently used methods of calculating abnormal monthly bond returns are biased. Most methods implemented in monthly data also lack power to detect abnormal returns. We also consider unique issues arising when using the newly available daily bond data, and formulate and test methods to calculate daily abnormal bond returns. Using daily bond data significantly increases the power of the tests, relative to the monthly data. Weighting individual trades by size while eliminating noninstitutional trades from the TRACE data also increases the power of the tests to detect abnormal performance, relative to using all trades or the last price of the day. Further, value-weighted portfolio-matching approaches are better specified and more powerful than equal-weighted approaches. Finally, we examine abnormal bond returns to acquirers around mergers and acquisitions to demonstrate how the abnormal return model and use of daily versus monthly data can affect inferences.

Original languageEnglish (US)
Pages (from-to)4219-4258
Number of pages40
JournalReview of Financial Studies
Volume22
Issue number10
DOIs
StatePublished - Oct 2009
Externally publishedYes

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Bond returns
Test statistic
Abnormal returns
Mergers and acquisitions
Weighting
Event study
Relative performance
Test methods
Inference

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Measuring abnormal bond performance. / Bessembinder, Hendrik; Kahle, Kathleen M.; Maxwell, William F.; Xu, Danielle.

In: Review of Financial Studies, Vol. 22, No. 10, 10.2009, p. 4219-4258.

Research output: Contribution to journalArticle

Bessembinder, H, Kahle, KM, Maxwell, WF & Xu, D 2009, 'Measuring abnormal bond performance', Review of Financial Studies, vol. 22, no. 10, pp. 4219-4258. https://doi.org/10.1093/rfs/hhn105
Bessembinder, Hendrik ; Kahle, Kathleen M. ; Maxwell, William F. ; Xu, Danielle. / Measuring abnormal bond performance. In: Review of Financial Studies. 2009 ; Vol. 22, No. 10. pp. 4219-4258.
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