Event Study Statistics Project Example | Topics and Well Written Essays - 1500 words

Event Study - Statistics Project Example With this in mind, an event study is considered the measure of impact of an event on a security value (MacKinlay, 1993). Considering the components of an asset cost, an event study further explores the availability and access of information and the immediacy of impounding such info onto prices. Events are characterised by variables such as short-horizon event studies that consider limited period, habitually hours to weeks and particular to the event at hand. Short-run events yield small returns and facilitate time to focus on information being released. Long-horizon event studies are problematic in that they are sensitive to the modeling assumption of the desired returns. The basic setup for an event study involves the identification of an event and the window, selection of a security, specifying and estimating the reference model characterizing the normal returns (expected returns). However, in order to estimate accurately whether illiquid premiums exist, the characters of liquid premiums must be established first. Thus, in order to test whether illiquid premiums exist, this paper aims at answering the research question, do stocks with higher illiquidity earn higher returns?, by the analysis of two events involving bond buyers? The paper analyzes the factors that affect s ecurity markets and identifies conditions that promote illiquidity premiums. Considering the theory on illiquid discounts, the risk-return model, and empirical study, illiquid discount should increase with increasing trading costs; illiquidity will increase when the market is down, and assets considered less liquid have historically had higher returns (Debondt & Thaler, 1985). Considering the fair market value of a security, a premium that investors will demand only when it can easily be converted into cash is referred as liquidity premium. When the liquid premium is considered too high, then the asset is