Conducting Event Studies on a Small Stock Exchange

Abstract

This paper analyses whether it is possible to perform an event study on a small stock exchange with thinly trade stocks. The main conclusion is that event studies can be performed provided that certain adjustments are made. First, a minimum of 25 events appears necessary to obtain acceptable size and power in statistical tests. Second, trade to trade returns should be used. Third, one should not expect to consistently detect abnormal performance of less than about 1% (or perhaps even 2%), unless the sample contains primarily thickly traded stocks. Fourth, nonparametric tests are generally preferable to parametric tests of abnormal performance. Fifth, researchers should present separate results for thickly and thinly traded stock groups. Finally, when nonnormality, event induced variance, unknown event day, and problems of very thin trading are all considered simultaneously, no one test statistic or type of test statistic dominates the others.

The effect of oil price changes on the price of Russian and Chinese oil shares

“…Residuals represent excess returns. The expected return according to Bartholdy et al (2007) is given by the following equation…”

“…For example, Brown and Warner (1985), Corrado (1989), Corrado and Zivney (1992), Cowan (1992), Cowan and Sergeant (1996), and Bartholdy et al (2007) use nonparametric tests in addition to parametric tests.…”

“…While the nonparametric rank test strongly indicates the existence of abnormal returns, the parametric test rejects the possibility of abnormal return. Bartholdy et al (2007) point out that in some instances the tests may give different results. In such situations, the nonparametric test is more reliable in detecting the abnormal return.…”

“…Event study methodology involves estimating the normal return for a security and calculating the direction and size of the excess return attributable to unanticipated information. Econometric techniques used in event studies are provided by Warner (1980, 1985), Dyckman et al (1984), Jain (1986), Ball and Taurus (1988), Corrado (1989), Corrado and Zivney (1992), Kritzman (1994), McWilliams and Siegel (1997), Bartholdy et al (2007), Díaz and Jareno (2013), Liebman and Tomlin (2015) and Kenjegaliev et al (2016). The theory is still growing, and the number of economists researching in this area is increasing, along with the sophistication of studies.…”

A Revised Trade-to-Trade Model for All Levels of Trading Thinness in Event Studies

“…Maynes and Rumsey (1993) describe this as the "lumped" method, and both they and Kallunki (1997) assess it and another hole-filling methodology called the "uniform" method in preparation for OLS processing. 3 But the lumped approach in particular is likely to load large numbers of zero-value returns into data sets with the likely effect that the variance of returns will be understated, which will cause tests of the abnormal returns to yield biased statistics (Bartholdy, Olson, and Peare 2007).…”