Expected return model, do we delete days with zero trading volume?
Posted: 23 June 2014 08:10 PM   [ Ignore ]
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Hi Joost,

I am trying to calculate abnormal returns for an event study.

To get abnormal returns, I first use historical data to estimate an expected return model: y=a+beta1*b,

When estimating the expected return model, do we only keep observations with non-zero trading volume?

Thanks a lot,

Anna

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Posted: 24 June 2014 07:59 AM   [ Ignore ]   [ # 1 ]
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hi Anna,

In the grand scheme of things, it probably doesn’t matter.Results for raw returns, size adjusted returns, market model, 3-4 factor models; they are typically consistent with each other (the measures are highly correlated).

When there is no trade on a given day, the (end of day) stock price and return are based on the mid-point of the bid and ask.  So non-trading days (months) still have return measure. One way to mitigate the issue is to use monthly returns to estimate the expected return model.

Hope this helps,

Joost

 

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