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Trading frequency and event study test specification
Authors:Arnold R. Cowan  Anne M.A. Sergeant
Affiliation:Iowa State University, College of Business, Department of Finance and Department of Accounting, 300 Carver Hall, Ames, IA 50011-2063, USA
Abstract:
We examine the effects of thin trading on the specification of event study tests. Simulations of upper and lower tail tests are reported with and without variance increases on the event date across levels of trading volume. The traditional standardized test is misspecified for thinly traded samples. If return variance is unlikely to increase, then Corrado's rank test provides the best specification and power. With variance increases, the rank test is misspecified. The Boehmer et al. standardized cross-sectional test (Event-study methodology under conditions of event-induced variance, Journal of Financial Economics 30, pp. 253–272) is properly specified, but not powerful, for upper-tailed tests. Lower-tailed alternative hypotheses can best be evaluated using the generalized sign test.
Keywords:Event study research methodology   Trading volume   Thin trading   Nonparametric tests   Nasdaq
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