NORWEGIAN SCHOOL OF

ECONOMICS

FIE401E Empirical Methods in

Finance

FINAL EXAM
Case: LOEWEN GROUP, INC.

Candidate numbers: 53
Student: Emma Itzel Crdoba Lara

April 20th 2016

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INDEX

I.

PAG.

Introduction... 2
I.I Background... 2
I.II Defensive Position. 2

II.

Event Study Methodology. 3

III.

Data Analysis. 6
III.I Data Characteristics......... 6
III.I. I Index Variables.............................................................................................. 6
III.I.II Stock Variables and Bonds 7

IV.

Estimating the Cumulative Abnormal Return (CAR)... 8

IV.I

Equity.... 8

IV.II

Preferences Shares..... 9

IV.III

Bonds... 10

V. Conclusion .. 10
Appendix 1. Graphics.. 11
Appendix 2. Do-File..... 12

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I.

Introduction

I.I

Background

Loewen Group, Inc. (LG) is a Canadian firm created in 1985 by Ray Loewen. The group was
formed to acquire funeral homes across the continent, and in 1987 it became a public firm,
which was a turning point. LG began an uprising trend of buying houses throughout Canada
and the US, which ultimately help the firm to become the second-largest North American
funeral chain.
LGs strategy consisted on buying family-owned homes as they were going through the process
of transferring the business from one generation to the next one. Knowledge of the importance
for people to be familiar with the family name and the prestige of the funeral home, LG kept
the name of the former family-owned homes, as well as the employees, who were made partowner by receiving five LGs shares.

Another turning point was when LG bought a funeral home in Jackson, Mississippi, owned by
the Reimann family, in 1991. That family had a rivalry with the OKeefe family, owners of
another funeral home. In April 1991 Jerry OKeefe complained that he had an exclusive
contract to supply homes in Mississippi funeral-expense insurance, and that agreement was
violated when the Reimann former houses sold insurance policies supplied by a Loewen
affiliate.
This began a costly trial process that lasted almost four years. On November 1st 1995 LG was
found guilty at several sections, having to pay OKeefe $100 million of compensation and $160
million in punitive damages. However, the latter were increased to $400 million after LG
presented its net worth, which accounted for $700 million.

I.II

Defensive Position

Given the jurys verdict, LG decided to file Chapter 11 lawsuits against the US government,
claiming that several NAFTAs articles were violated. Hence, the firm is considering to assess
the damages that should be ask as compensation.

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LGs legal team is quantifying the damages by computing the financial costs the firm had to
go through when its debt rating was lowered which made its borrowing rate to increase by 60
basis points. In addition, LG was also affected when the costs of issuing equity increased during
the trial years, and when it had to issue convertible securities which raised less money than
what it would have gain if there was no trial. However, despite all this monetary costs that
should be accounted as damages, the legal team is not considering the cost of opportunity the
firm lost when its economic value was decreased given the change on investors perceptions
about the company.

When there are efficient markets, any new information is supposed to be processed in the
market instantly. Thus, in efficient markets the shares prices will adjust immediately to this
flow of new information. Hence, investors beliefs can easily impact stock prices, which
ultimately affect the firm value. Therefore, the change in LGs stock price should be quantified
before and after the trial verdict, because its market capitalization is impacted by this change.
In this sense, another method of computing the damages should be used, which evaluates the
ex-ante and ex-post value of the firm, this method is known as an event study.

II.

Event Study Methodology

By definition, an event study measures the impact of a specific event on the value of a firm.
The usefulness of such a study comes from the fact that, given rationality in the market, the
effects of an event will be reflected immediately in security prices.

This methodology has many applications in accounting and finance. In addition, this approach
can be used in the field of law and economics to measure the impact on the value of a firm of
a change in the regulatory environment and in legal liability (Mackinlay, 1997).

In this case, event study methodology will provide an ideal tool for quantifying the outcome
and assess the damage of The OKeefe Trial. The objective is to analyze the event to see if the
trial had an impact on the market value. If so, there should be a correlation between the
observed change of the market value of the company and the information.

When doing an event study, three things should be considered: the event day, the event window,
and the estimation window.
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The event day is key in the analysis, since this date will be the reference day to decide
the length of the event window and the estimation window (Mackinlay, 1997). The
event day is when the announcement that might have had an impact on the returns was
made. Hence, in this case the event day is November 1st 1995, since this is the day the
jury announced the verdict of all the damages LG had to pay to OKeefe. And assuming
efficient markets this should reflect in the market immediately. As can be seen in
Graphs 2 to 5, the prices of the common and preferred stock have a downward trend in
1998, which was more pronounced in the former. This might have been driven by LGs
arbitration against the US government, even though the market indexes returns also
suffered during that period, as seen in Graph 1, thus the decrease of LGs stock prices
during 1998 might have been caused by a systemic risk, caused probably by the Russian
crisis that affected the whole financial system. However, this falls out of our event study
as we are set to determine to effect of the trial news. Given those factors and because
the costs of the jury verdict are the interest of this analysis, the only event day used in
this study is the verdict announcement date.
The event window is often expanded to multiple days, including at least the day of the
announcement and the day after the announcement. In this analysis the event window
lasts two days, the 1st and 2nd of November 1995. According to Fama (1970) markets
react rationally to the release of public information, this kind of semi-strong efficiency
of the market is basically the purpose of an event study. Thus the impact of the verdict
announcement on the stock prices should be reflected in the stock price of November
1st 1995 and the following day as bad news tends to frightened investors, and it would
be expected that they follow a Herd behavior. As can be seen in Graphs 4 and 5, the
common stocks had a reduction of 16% on its value just after the announcement date.
These kind of stocks are the most traded ones, and thus reflect more rapidly investors

perceptions about risk. However, for the preferred stocks and the bonds the event
window goes from the week before the announcement day, to the next week of it. This
two instruments use weekly data because of missing and manipulated data (explained
in more detail in section III).

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The estimation window is the period of trading days prior the event date (and event
window). It is used to estimate the expected return of the asset. In this case, the
estimation window comprises of 250 trading days, which accounts for a year prior the
event window. This period is selected because short-horizon event studies are more
reliable than long-horizon event studies, mainly because huge historical data is less
probable to affect todays stock price. We have also checked for robustness by changing
the estimation window, to example 120 estimation days. This resulted in almost no
change in the abnormal return, and hence shows that our market model is robust.
For the preferred stocks and bonds, the estimation window is 12 weeks prior the event
window, this is basically because of lacking more historical weekly observations,
making the data not truly sufficient.

Once the dates are defined, the events impact computation requires a measure of an abnormal
return, which is the actual ex-post return of the security over the event window minus the
normal return of the firm over the event window. The normal return is defined as the expected
return without conditioning on the event taking place. That normal return is computed with the
market model, which assumes a stable linear relation between the market return and the
security return (Mackinlay, 1997), and is defined by the following equation:

(1)
where and are the parameter estimates with which the abnormal returns can be calculated.
Ideally, the empirical results will lead to insights relating to understanding the sources and
causes of the effects (or lack of effects) of the event study.

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III.

Data Analysis

III.I

Data Characteristics

The data provided consists of daily (from the 13th of April 1990 until the 13th of April 2000)
and weekly time series format (from 11th of August 1995 until 30th of August 1996). This data
includes only trading days not calendar days. In addition, the data is considered as a relatively
long time period making the data sufficient for the analysis of daily returns, but not weekly.

To compute the model different variables were used, which are specified in Table 1.

These variables are transformed into natural logarithms in order to have a better comparison
of the performance in prices, due to the variations in absolutes values. Plus, there are no
negative values in the dataset, hence it is valid to incorporate the natural logarithm.

III.I. I Index Variables

According to Graphics 1 to 5 (Appendix I), it can be observed a fairly linear relationship

between time and indexes, stock prices and exchange rate. This relation was expected at the
beginning and now are confirmed that the prices are set by a random walk.
As we have incorporated the log-values, we observe the percentage change in the different
indexes according to time and we can observe that they are following a random walk with a
drift due to efficient markets and an expectation of higher future prices. According to Dickey
Fuller test for non-stationarity, confirms that we have a problem with unit roots, but since we
are estimating the returns, we do not need to compute the first differences in order to have a
stationary time series.

Even though Loewen Group, Inc. is a Canadian company, it is also one of the two largest
companies in the North-American deathcare industry. By 1995, LG had nearly 10,000

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employees in 814 funeral homes and 179 cemeteries across North America. The firm trades in
the Toronto and NASDAQ Stock Exchanges, thus when LGs trial verdict was announced, its
shareholders suffered a 20% loss over two days in those exchanges. Given that there is a lack
of information of the NASDAQ index, the S&P500 index can be used as a proxy for it.
However, after analyzing the Toronto Index and the S&P500 together, we find high
multicollinearity and correlation between the two markets and should hence only use one of
the indexes for our analysis to avoid spurious regressions. And the fact that the costs of
damages originated by an American trial and all costs are considered in US dollars the S&P500
index is use to represent the market in this analysis.

III.I.II Stock Variables and Bonds

The data set includes stock prices (CommonUSD, PreferredUSD) and bonds. All of these
variables are also as expected non-stationary as we have confirmed with a Dickey Fuller test.
But since we are estimating the returns we dont need to compute the first differences in order
to have a stationary time series.
Nevertheless, we observed an unusual result in the daily PreferenceCAD price. It seems to be
a fixed price so there is a zero return after the 29th of May 1990. This is a violation of the Gauss
Markov assumption 1 that states that we need a random sample of observations to get an
unbiased OLS estimate.

The analysis of CommonUSD stocks is based on daily data in order to observe the rapid
changes in the market. It is quicker at reacting to level shifts and changes in trends, which is
also typical for common traded stocks. We consider that daily data is superior for shortterm/medium tactical forecasting.

However, according to the provided daily Preference shares USD stock data do not matched
with the weekly data seen on exhibit 3 and 4, it seems inconsistent and tampered with and we
cannot trust the values provided. Violations of assumption number 1 with non-random simple
and therefore we do not get an unbiased estimator. Since we do consider the case text for
reliable information, we estimate the Preference share with the weekly data.

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In addition, we do not have a good proxy or index in our dataset to assess bonds market
performance, and it does not make sense to benchmark against equities indexes since they are
to very different securities and thus behave differently. Hence, the method chosen to compute
bonds abnormal returns is different to the one used for stocks. The method used for bonds
considers a constant mean return model in order to compute the normal returns and it states
that the mean return has to be constant across time.

As we see with bond returns, it is not the case here. However, since we do not have a bond
index in this case we want to illustrate how we could create a normal return without an index.
In order to compute a proper proxy and a normal return for LG s bonds we need an index that
correspond with LGs own. That would implicate bonds with same maturity and rating as LGs
corporate bonds.

IV.

Estimating the Cumulative Abnormal Return (CAR)

IV.I

Equity

In order to compute the CAR for the equities, as explained earlier, the event window is equal
to 2, and the estimation window equal to 250. The normal return is predicted by regressing the
log returns of CommonUSD on the log returns of the S&P 500. Then the abnormal returns on
the two event dates are computed as in Equation 2, which are used to calculate the Cumulative
Abnormal Return (Equation 3).
ARi = Ri E(Ri|X)

(2)

(3)

Once, the CAR is calculated, its significance should be tested according the following
hypothesis:
H0: CAR= 0
With an alternative hypothesis stating that CAR is significantly different from zero at the 5 %
interval, hence the critical values are 1.96.
Ha: CAR0

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This result is significant at the 5% significance level because the t-statistic is below the critical
value of -1.96 and resulting in rejecting the H0, concluding that the abnormal return caused by
the event is statistically different from 0. As show in Table 2.

The damages caused by the trial on the commonUSD shares is calculated by taking the natural
logarithms of the price before the event to compute in the CAR. It is then inversed back by the
exponential function to finally compute the loss in USD caused by the event (trial verdict).

IV.II Preferences Shares

Since preference shares have a low correlation with the big market indices, it is hard to find an
index that predicts proper normal returns in the event window. However, as explained in section
III, the S&P500 index was chosen given the lack of better options. The regression output for
the variables log return PreferredUSD on log return S&P500 (the market model) shows that
the coefficients are not significant on a 5% level, as we expected, but we still use this to predict
the normal returns during the event window. We are aware of that this might affect the certainty
surrounding the CAR, and that cost related to abnormal changes in preference shares must be
regarded as uncertain. As we move on, the computed CAR is -0,0264 and significant at the 5%
level and resulting in rejecting the H0, concluding that the abnormal return caused by the event
is statistically different from 0. The cost of damages related preference shares is displayed in
the below table. The costs are calculated as in equities.

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IV.III Bonds

With use of the constant mean return model we got a CAR of -0,00324 with a t-statistic of

1.91 making it slightly not significant at the 5% interval. In other words, keep H0, that the
event did not create abnormal returns on bonds. However, since we know that our bond
estimate is not correct because the mean return is not constant across time, we choose not to
calculate the cost of decrease in value due to the event. Beside in order to assess the total cost
related to bond pricing we need information on the number of issued bonds and the maturity of
each individual bond.

V. Conclusion

Doing the previous analysis proved several things. First, any public event, no matter its size,
has an impact in the economy, and this is translated into the financial markets. The financial
system is so unified that any news affect stock prices almost immediately. What happened with
the Loewen Group proves that not even big companies are exempt of investors Herd
Behavior. Second, the event study methodology is a quick and interesting way of computing
the effect an event has on financial instruments, as long as the proper information is available.
However, this method is somehow subjective given the fact that exact dates might not be
known. Lastly, as could be seen in this case, the verdict announcement indeed caused abnormal
returns to the firm, which are helpful to assess the damages LG can demand to the US
government.

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Appendix 1. Graphics

Graphic 1. Indexes

Graphic 2. PreferredUSD

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Graphic 3. PreferredCAD

Graphic 4. CommonCAD

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Graphic 5. CommonUSD

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Appendix 2. Do-File

cd "M:\Empirical Methods\LoewenGroup"
import excel using Daily_data.xlsx, sheet ("Sheet1") cellrange (A1:I2611) clear first

rename TorontoLargest60Index TorontoL60

rename TorontoBroadIndex TorontoBroad
rename EquityTorontoinCAD CommonCAD
rename EquityTorontoinUSD CommonUSD
rename PreferenceSharesTorontoinC PreferredCAD
rename PreferenceSharesTorontoinU PreferredUSD
rename USTOCANADIANEXCHANGER USDtoCAD

*Getting the right date format

gen date2 = date(Date, "DMY")
format date2 %td
sort date2

drop if date2>=d(1.11.1999)

corr TorontoBroad SP500

*Generating log variables

gen lnTorontoL60= ln(TorontoL60)
gen lnTorontoBroad= ln(TorontoBroad)
gen lnSP500= ln(SP500)
gen lnCommonCAD= ln(CommonCAD)
gen lnCommonUSD= ln(CommonUSD)
gen lnPreferredCAD= ln(PreferredCAD)
gen lnPreferredUSD= ln(PreferredUSD)
gen lnUSDtoCAD= ln(USDtoCAD)

tsset date2
tsline lnTorontoL60 lnTorontoBroad lnSP500 lnUSDtoCAD
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tsline d.lnCommonUSD

tsline d.lnTorontoL60 d.lnTorontoBroad d.lnSP500

reg lnCommonUSD lnTorontoBroad lnSP500 lnUSDtoCAD

vif

reg lnCommonUSD lnTorontoBroad lnSP500

vif

reg lnCommonUSD lnSP500 lnUSDtoCAD

vif

reg lnCommonUSD lnSP500

vif

dfuller lnCommonUSD
dfuller lnSP500
dfuller lnTorontoBroad

dfuller d.lnCommonUSD
dfuller d.lnSP500
dfuller d.lnTorontoBroad

gen r_lnTorontoL60= (lnTorontoL60-lnTorontoL60[_n-1])/lnTorontoL60[_n-1]

gen r_lnTorontoBroad= (lnTorontoBroad-lnTorontoBroad[_n-1])/lnTorontoBroad[_n-1]
gen r_lnSP500= (lnSP500-lnSP500[_n-1])/lnSP500[_n-1]
gen r_lnCommonCAD= (lnCommonCAD-lnCommonCAD[_n-1])/lnCommonCAD[_n-1]
gen r_lnCommonUSD= (lnCommonUSD-lnCommonUSD[_n-1])/lnCommonUSD[_n-1]
gen r_lnPreferredCAD= (lnPreferredCAD-lnPreferredCAD[_n-1])/lnPreferredCAD[_n-1]
gen r_lnPreferredUSD= (lnPreferredUSD-lnPreferredUSD[_n-1])/lnPreferredUSD[_n-1]

corr r_lnSP500 r_lnTorontoBroad

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dfuller r_lnCommonUSD

gen r_TorontoL60= (TorontoL60-TorontoL60[_n-1])/TorontoL60[_n-1]

gen r_TorontoBroad= (TorontoBroad-TorontoBroad[_n-1])/TorontoBroad[_n-1]
gen r_SP500= (SP500-SP500[_n-1])/SP500[_n-1]
gen r_CommonCAD= (CommonCAD-CommonCAD[_n-1])/CommonCAD[_n-1]
gen r_CommonUSD= (CommonUSD-CommonUSD[_n-1])/CommonUSD[_n-1]
gen r_PreferredCAD= (PreferredCAD-PreferredCAD[_n-1])/PreferredCAD[_n-1]
gen r_PreferredUSD= (PreferredUSD-PreferredUSD[_n-1])/PreferredUSD[_n-1]

ttest r_lnPreferredUSD==0
ttest r_CommonUSD==0

******************************************
*Generating event date
gen event_date=.
replace event_date=d(01.11.1995) if date2==d(01.11.1995)
format event_date %td

*Trading days
gen datenum=_n
gen target=datenum if date2==event_date
egen td=min(target)
drop target
gen dif=datenum-td

*Event window and estimation window

gen event_window=1 if dif>=0 & dif<=1
egen count_event_obs=count(event_window)
gen estimation_window=1 if dif<-1 & dif>=-252
egen count_esti_obs=count(estimation_window)
replace event_window=0 if event_window==.
replace estimation_window=0 if estimation_window==.
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***************************************************
*Estimating Normal Performance CommonUSD
gen predicted_returnCoUSD=.
reg r_lnCommonUSD r_lnSP500 if estimation_window==1, robust
predict pCoUSD
replace predicted_returnCoUSD = pCoUSD if event_window==1
drop pCoUSD

*Abnormal Returns CommomUSD

gen abnormal_returnCommonUSD=r_lnCommonUSD-predicted_returnCoUSD if
event_window==1

*Cumulative Abnormal Returns CommomUSD

egen cumulative_abnormal_returnCoUSD = sum(abnormal_returnCommonUSD)

*T-test CommomUSD
sort date2
egen ar_sd_CoUSD = sd(abnormal_returnCommonUSD)
gen test_CoUSD =(1/sqrt(count_event_obs)) *
(cumulative_abnormal_returnCoUSD/ar_sd_CoUSD)
list cumulative_abnormal_returnCoUSD test_CoUSD if dif==0

*export excel event_date cumulative_abnormal_returnCoUSD test_CoUSD using

"results.xlsx" if dif==0, firstrow(variables) replace

*************************************************

*Estimating Normal Performance PreferredUSD

gen predicted_returnPrUSD=.
reg r_lnPreferredUSD r_lnSP500 if estimation_window==1, robust
predict pPrUSD
replace predicted_returnPrUSD = pPrUSD if event_window==1
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drop pPrUSD

*Abnormal Returns PreferredUSD

gen abnormal_returnPreferredUSD=r_lnPreferredUSD-predicted_returnPrUSD if
event_window==1

*Cumulative Abnormal Returns PreferredUSD

egen cumulative_abnormal_returnPrUSD = sum(abnormal_returnPreferredUSD)

*T-test PrefferredUSD
sort date2
egen ar_sd_PrUSD = sd(abnormal_returnPreferredUSD)
gen test_PrUSD =(1/sqrt(count_event_obs)) *
(cumulative_abnormal_returnPrUSD/ar_sd_PrUSD)
list cumulative_abnormal_returnPrUSD test_PrUSD if dif==0

*export excel event_date cumulative_abnormal_returnPrUSD test_PrUSD using

"results.xlsx" if dif==0, firstrow(variables) replace

**************************************************

******Preference and Bond assessment and matching daily to weekly**************

clear
import excel using Daily_data.xlsx, sheet ("Sheet1") cellrange (A1:I2611) clear first

rename TorontoLargest60Index TorontoL60

rename TorontoBroadIndex TorontoBroad
rename EquityTorontoinCAD CommonCAD
rename EquityTorontoinUSD CommonUSD
rename PreferenceSharesTorontoinC PreferredCAD
rename PreferenceSharesTorontoinU PreferredUSD
rename USTOCANADIANEXCHANGER USDtoCAD

gen date2 = date(Date, "DMY")

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format date2 %td

sort date2

drop if date2>=d(1.11.1999)

*Generating log variables

gen lnTorontoL60= ln(TorontoL60)
gen lnTorontoBroad= ln(TorontoBroad)
gen lnSP500= ln(SP500)
gen lnCommonCAD= ln(CommonCAD)
gen lnCommonUSD= ln(CommonUSD)
gen lnPreferredCAD= ln(PreferredCAD)
gen lnPreferredUSD= ln(PreferredUSD)
gen lnUSDtoCAD= ln(USDtoCAD)

gen r_lnTorontoL60= (lnTorontoL60-lnTorontoL60[_n-1])/lnTorontoL60[_n-1]

gen r_lnTorontoBroad= (lnTorontoBroad-lnTorontoBroad[_n-1])/lnTorontoBroad[_n-1]
gen r_lnSP500= (lnSP500-lnSP500[_n-1])/lnSP500[_n-1]
gen r_lnCommonCAD= (lnCommonCAD-lnCommonCAD[_n-1])/lnCommonCAD[_n-1]
gen r_lnCommonUSD= (lnCommonUSD-lnCommonUSD[_n-1])/lnCommonUSD[_n-1]
gen r_lnPreferredCAD= (lnPreferredCAD-lnPreferredCAD[_n-1])/lnPreferredCAD[_n-1]
gen r_lnPreferredUSD= (lnPreferredUSD-lnPreferredUSD[_n-1])/lnPreferredUSD[_n-1]

sort date2

*Converting daily to weekly data

gen dw = wofd(date2)
format dw %tw
collapse r_lnSP500 r_lnTorontoBroad r_lnCommonUSD r_lnPreferredUSD, by(dw)

save "M:\Empirical Methods\LoewenGroup\Daily.dta", replace

clear
import excel using Weekly_data.xlsx, sheet ("Sheet1") cellrange (A1:D57) clear first
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gen date2 = date(Date, "DMY")

format date2 %td
sort date2

gen lnPreferred= ln(Preferred)

gen lnCommon= ln(Common)
gen lnBond= ln(Bond)

gen r_lnPreferred= (lnPreferred-lnPreferred[_n-1])/lnPreferred[_n-1]

gen r_lnCommon= (lnCommon-lnCommon[_n-1])/lnCommon[_n-1]
gen r_lnBond= (lnBond-lnBond[_n-1])/lnBond[_n-1]

gen dw = wofd(date2)
format dw %tw

merge 1:1 dw using "M:\Empirical Methods\LoewenGroup\Daily.dta"

*Generating event date

gen event_date=.
replace event_date=d(03.11.1995) if date2==d(03.11.1995)
format event_date %td

*Trading weeks
gen datenum=_n
gen target=datenum if date2==event_date
egen td=min(target)
drop target
gen dif=datenum-td

*Event window and estimation window

gen event_window=1 if dif>=0 & dif<=1
egen count_event_obs=count(event_window)
gen estimation_window=1 if dif<-1 & dif>=-252
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egen count_esti_obs=count(estimation_window)
replace event_window=0 if event_window==.
replace estimation_window=0 if estimation_window==.

*************************************************
*Estimating Normal Performance Weekly PreferredUSD
gen predicted_rlnPreferred=.
reg r_lnPreferred r_lnSP500 if estimation_window==1, robust
predict pPrUSD
replace predicted_rlnPreferred = pPrUSD if event_window==1
drop pPrUSD

*Abnormal Returns Weekly PreferredUSD

gen abnormal_rlnPreferred=r_lnPreferred-predicted_rlnPreferred if event_window==1

*Cumulative Abnormal Returns Weekly PreferredUSD

egen cumulative_abnormal_returnPrUSD = sum(abnormal_rlnPreferred)

*T-test PrefferredUSD
sort date2
egen ar_sd_PrUSD = sd(abnormal_rlnPreferred)
gen test_PrUSD =(1/sqrt(count_event_obs)) *
(cumulative_abnormal_returnPrUSD/ar_sd_PrUSD)
list cumulative_abnormal_returnPrUSD test_PrUSD if dif==0

***************************************************

*Estimating Normal Performance Bond

egen constant_meanBond= mean(r_lnBond)
egen constant_meanBond2= mean(r_lnBond) if datenum>=1 & datenum<=12
egen natural_returnBond= mean(constant_meanBond2)
egen constant_meanBond3= mean(r_lnBond) if datenum>12

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*Abnormal Returns Bond

gen abnormal_returnBond=r_lnBond-natural_returnBond if event_window==1

*Cumulative Abnormal Returns Bond

egen cumulative_abnormal_returnBond = sum(abnormal_returnBond)

*T-test Bond
sort date2
egen ar_sd_Bond = sd(abnormal_returnBond)
gen test_Bond =(1/sqrt(count_event_obs)) * (cumulative_abnormal_returnBond/ar_sd_Bond)
list cumulative_abnormal_returnBond test_Bond if dif==0

References

Bessembinder, H., Kahle, K., Maxwell, W., Xu, D., (2009). Measuring abnormal bond
performance. Review of Financial Studies, 22, 4219 4258.
Dickey, D.A. and Fuller, W.A. (1979). Distribution of the estimators for autoregressive time
series with a unit root. Journal of the American Statistical Association, 74(336a)
427431.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of
Finance, 25, 383417.
Mackinlay, A. C. (1997). Event studies in economic and finance. Journal of Economic
Literature, 35, 1339.
Woolridge, Jeffrey M. (2009) Introductory Econometrics: A Modern Approach. 4th edition.
Michigan State University

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