Two Topics:

A. What is an Event Study?B Introduction to Intra Day StockB. Introduction to Intra-Day Stock

Market Data (TAQ)

Michael BoldinDirector of Research Support Services WRDSDirector of Research Support Services, WRDS

October 1, 2007

What is an Event Study?What is an Event Study?Event studies measure of the impact of specific events

on the value of specific firms or a group of firmson the value of specific firms or a group of firms.

The time-series responses of stock prices are investigated to find statistically significant events (not just anecdotes).

Efficient Market Hypothesis: the impact of a public event will be reflected immediately in stock prices, but only if it has ‘information’ or real content.

Classic Finance Examples:Classic Finance Examples: – Mergers and Acquisitions, – Stock splits and Dividend payments,– Earnings announcements,– Sudden changes in the Executive Board.

Other applications: law and economics—change in regulatory environment or a court case decision.macroeconomics—announcement of trade deficit or a change in Fed policy.marketing—introduction of a new product (maybe on competitors).

Event Study MethodsEvent Study MethodsPioneers:

Ball and Brown (1968)—reactions of stock prices to announcements of earningsBall and Brown (1968) reactions of stock prices to announcements of earnings.1. Identify the relevant events and dates.2. Match to the corresponding stocks.3. Construct a measure of the event’s impact

on security prices before and after the event. y p

A good general introduction:

MacKinlay (1997) “Event Studies in Economics and Finance,” Journal of Economic LiteratureJournal of Economic Literature.

The econometrics:

EVENTUS Manual, “Appendix A: Technical Reference”.pp

Kothari and Warner (2006) “Econometrics of Event Studies” in the Handbook of Corporate Finance: Empirical Corporate Finance

Event Study MethodsEvent Study MethodsStock prices are analyzed over ‘Windows.

The analysis is usually limited to (-30 to +30) day windowsThe analysis is usually limited to (-30 to +30) day windows. Windows of (-10 to -1) and (0 to +1) days are often the most interesting.

The goal is to determine: ( ) Did ff t ? d if(a) Did an effect occur? and if so (b) Did it occur in a manner consistent with the

efficient market hypothesis? versus (c) Was there a clear trading opportunity? and(d) Was there anticipation that suggests early

‘leakage’ of information?

The concept of ceteris paribus is important-- ‘What if’ there was no event?The concept of ceteris paribus is important What if there was no event?

Event Study DetailsEvent Study DetailsMethodology• Define the event of interest• Define the event of interest.• Define the period over which the prices will be examined: the event window.

Most important event window might be the announcement date or date+1.The periods prior and right after the event might be of interest too.

• Determine selection criteria for the inclusion of a firm to the study. yExample: SP500 additions. It is good practice to summarize some sample characteristics: market capitalization, industry representation…

• Gather the appropriate data For the US: invariably CRSP stock prices. • Measure the event’s impact on each stock and aggregate (average)• Measure the event s impact on each stock and aggregate (average).

Impact measured by ‘abnormal’ return.:

Event Study DetailsEvent Study DetailsAbnormal Return:

Actual return of the security – Expected return

(conditioning on information that is independent of the event taking place)

For firm i , event date t , the abnormal return is:

ARit = Rit – E(Rit | Xt ) t=0 on the Event day

CAR Cumulative Abnormal Return (in a window)CAAR Averaged over all stock events (in a window)

The S&P 500 IndexThe S&P 500 Index2007 marks the 50th anniversary of the S&P 500. Introduced on March 4th, 1957.

An older S&P Composite Index (less than100 stocks) is often spliced on to the S&P 500 to get a time series back to the early 1900sS&P 500 to get a time series back to the early 1900s.

The S&P 500 is one of the most widely followed U.S. stock market indices:

Goal: Reflect the risks and returns of the broad large cap stock universeGoal: Reflect the risks and returns of the broad large cap stock universe.• Maintained by the S&P Index Committee that monitors constituent liquidity

(for efficient portfolio trading) while keeping turnover to a minimum.• Fairly representative of the overall market (much better than the Dow Jones Industrials

30). The constituents equal about 75% of total US equity values.

Criteria for index inclusion:• U.S. Company (also consider location of the company’s operations, its corporate

structure, its accounting standards and its exchange listings). Must be an operating company (no close-end funds, holding companies, or partnerships)or partnerships).

• Market Capitalization above $ 5 billion and public float of at least 50%, plus adequate liquidity and reasonable price history.

• Financial Viability with at least four consecutive quarters of positive.

S&P 500 AdditionsS&P 500 AdditionsOn average, 20 to 30 stocks are removed and replaced each year.

The reasons for changes include mergers & acquisitions, financial distress, legal concerns, trading liquidity problems, or an exchange delisting.

Changes are made on a case by case basis and broad sector representation is desiredChanges are made on a case-by-case basis and broad sector representation is desired I.e., there is an attempt to cover all important industries. Replacements are often from the same general industry.

The S&P Index Committee explicitly states that an addition to the 500 is not anThe S&P Index Committee explicitly states that an addition to the 500 is not an endorsement of the company or a positive statement about its future prospects.

Still … It is interesting to test whether the event of being added to the S&P 500 gives a boost to the stock price (irrespective of what S&P says).p ( p y )

S&P 500 AdditionsS&P 500 AdditionsWhy Zero Effect Might be Expected: All information is already publicly available at the

time of the addition By definition this is an information-free event and should nottime of the addition. By definition, this is an information free event and should not have any impact on the firm’s market value.

Addition events allow us to test whether the demand curve for stocks is flat (elastic) or downward sloping (simple demand and liquidity effects).

If there is a perfect substitute or a close substitute for the addition, then no or little effect should occur, irrespective of liquidity issues.

V i t di d ti b k t th 1980 hVarious studies dating back to the 1980s show:An almost immediate price increase of 3 to 7%. There is debate on the permanent effects.

… Are upward spikes reversed when liquidity adjusts?

S&P 500 Events Study Li O iLiterature Overview

Pioneering studies:Shl if (1986) f l t l (t ff t)– Shleifer (1986) argues for a complete reversal (temporary effect).

– Haris and Gurel (1986) argue there is an important reversal (from 3.13% to -2.49 over the next 29 trading days.

Follow-up literature:p– Beneish & Whaley(1996) and Lynch and Mendenhall (1997) find only

partial reversals.– Dhillon & Johnson (1991) replicate Shleifer’s 1986 paper and reject the

complete reversal. They look at prices for call options on newly included co p ete e e sa ey oo at p ces o ca opt o s o e y c udedstocks on the announcement date. There is a “certification of quality” effect.

– Wurgler and Zhuravskaya (2000) find that abnormal returns are larger for stocks that are less likely to have substitutes. y

– Denis et al. (2002) argue that firms included in the SP500 perform better over the next year than the market or industry benchmark.

Most results points to a permanent effect, with a little reversal.p p ,

S&P has a web site devoted to all of their indexes that lists constituent changes and the dates.

It is easy to paste the change list into an Excel sheet and then match each case to a CRSP PERMNO because the ticker symbols are ‘dated’ and company names can be compared.

A few casesA few cases ...

All 26 Cases:C d 0 h E DCentered at 0 as the Event Day

PRCx_CBH

0 06

0. 07

0. 01

0. 02

0. 03

0. 04

0. 05

0. 06

-0. 04

-0. 03

-0. 02

-0. 01

0. 00

-0 10

-0. 09

-0. 08

-0. 07

-0. 06

-0. 05

-0. 14

-0. 13

-0. 12

-0. 11

-0. 10

-5 -4 -3 -2 -1 0 1 2 3 4 5

edays

Eventus web query uses a simple text file of CRSP PERMNOs and dates—conversion ofCRSP PERMNOs and dates conversion of Ticker Symbol to PERMNO is needed.

Output includes SAS program listing, plus the saslog and the actual Eventus code

Screen shot of Eventus output

EVENTUS -- S&P 500 Addition Effects for 2006 26 t t l (1 j t d b f d t )

E t (R) S ft f C R h L C

26 total cases (1 rejected because for data reasons)

Eventus (R) Software from Cowan Research, L.C. Market Adjusted Returns, Equally Weighted Index Mean

C l ti P i i Cumulative Precision Abnormal Weighted Positive: Patell Days N Return CAAR Negative Z ---------------------------------------------------------------------------------- ( 30 2) 25 2 52% 3 92% 16 9) 1 901*(-30,-2) 25 2.52% 3.92% 16:9) 1.901* (-1,0) 25 1.56% 1.08% 14:11 1.995* (+1,+30) 25 -5.03% -5.66% 4:21<<< -2.714** ------------------------------------------------------------------------------

Second Topic:A What is an Event Study?A. What is an Event Study?

B. Introduction to Intra-Day Stock Market Data (TAQ)

Intra-day TAQ (Trade and Quote) Datad M k t Mi t t R hand Market Microstructure Research

Based on Consolidated Tape Association (CTA). Trade and Quotes from different systems/plans (CTA & CQS // CTP & CQP)Trade and Quotes from different systems/plans (CTA & CQS // CTP & CQP). Data starts in 1993. Not the only US Intra-day data.

Trades and Quotes for 8+ U.S. ExchangesNYSE AMEX NASDAQ Boston Cincinnati Chicago Pacific PhiladelphiaNYSE, AMEX, NASDAQ, Boston, Cincinnati, Chicago, Pacific, Philadelphia + Additional electronics: (NASD, Island, Independent)

No pure OTC or Pink Sheet stocks

Most stocks are officially ‘listed’ on only one exchange (serves as primary), Many stocks are traded and quoted on all exchangesMany stocks are traded and quoted on all exchanges.

NYSE and NASDAQ dominate When either is the primary exchange, they handle most of the trades and usually have the ‘best’ bids and offers (smallest quote spreads)and usually have the best bids and offers (smallest quote spreads).

Market Microstructure: There are different market types (rules, procedures and conventions) among the exchanges, and the rules for trades and quotes have changed over time.

NYSE Specialists pand Open Outcry System

NASDAQ Electronic Book Display

Some of the Important TermsSome of the Important TermsBid, Offer, Ask, Spread, Block Size

S i li t M k t M k ECNSpecialist, Market Maker, ECN,Market order, Limit order, Book, NBBOLevel II Display, Crossed Trade, Front-running

BBO = Best Bid-OfferNBBO = National Best Bid-Offer

(across all exchanges)

TAQ quotes should show ‘Best’ quotes at exchange when improved, corrected, or withdrawal. Not the entire ‘book’.

How is TAQ Used?How is TAQ Used?Most Common: Determine average quote spread for a stock, class or group of

stocks or an entire exchange in a date and/or time rangestocks or an entire exchange in a date and/or time range.Second most common: Determine how trades affect quotes and vice-versa. Old/New: Look for stale pricing and mis-behavior.Relatively New: Treat Intra day volatility as a high frequency time seriesRelatively New: Treat Intra-day volatility as a high-frequency time series

(Realized volatility & GARCH effects)

Research Findings:Th b d t f fi d t i i h d t ff t– The abandonment of fixed-rate commissions had great effects.

– NYSE ‘centralized’ auction system has worked well in terms of execution, while NASDAQ electronic trading has benefited small stocks and small traders (with some caveats).

– Decimalization effects are noticeable.Decimalization effects are noticeable.– Exchange competition has increased, despite consolidation.

Still, it looks like ‘too much’ trading occurs. Noise dominates information.

TAQ Data on WRDSTAQ Data on WRDSSubscription permissions are on a ‘Year’ basisData is bought permanently (not licensed for a 12 month term)Data is bought permanently (not licensed for a 12-month term).

SAS dataset files organized by month. Additional Datafiles:Quotes in CQyymm Dividend Files (DIVyymm)Trades in CTyymm Master Files (MASTyymm)Trades in CTyymm Master Files (MASTyymm)

with CUSIPs linked to SYMBOLSAS CT and CQ data table design:

Trades and quotes are identified by SYMBOL + DATE & TIMESorted by SYMBOL-DATE-TIME yComposite index: SYMBOL + DATE (new performance feature)

Different physical file system locations (for ‘years’ due to size and to ease I/O burdens) All consolidated in the TAQ SAS LIBNAME.

A. Web querying—just need to set the date range.2 Gig output limit, limiting the SYMBOLs and Date range for one extract

B. SAS programs—use our consolidated TAQ library definitions I.e., data=TAQ.CT0612).

TAQ Trade Extract for IBMTAQ Trade Extract for IBMSYMBOL DATE TIME PRICE G127 CORR COND EX SIZE

IBM 20061010 10:00:01 84.080 0 0 N 300IBM 20061010 10:00:04 84.130 0 0 P 100IBM 20061010 10:00:05 84.110 0 0 D 500IBM 20061010 10:00:05 84 130 0 0 D 100IBM 20061010 10:00:05 84.130 0 0 D 100IBM 20061010 10:00:06 84.130 0 0 D 100IBM 20061010 10:00:08 84.129 0 0 D 100IBM 20061010 10:00:10 84.120 0 0 N 300IBM 20061010 10:00:12 84.130 0 0 D 100IBM 20061010 10:00:12 84.120 0 0 D 800IBM 20061010 10:00:12 84.120 0 0 D 100IBM 20061010 10:00:12 84.130 0 0 D 100IBM 20061010 10:00:13 84.120 0 0 N 600IBM 20061010 10:00:15 84 140 0 0 N 200IBM 20061010 10:00:15 84.140 0 0 N 200IBM 20061010 10:00:15 84.130 0 0 D 100

TAQ Quote Extract for IBMTAQ Quote Extract for IBMSYMBOL DATE TIME BID OFR BIDSIZ OFRSIZ MODE EX MMID

IBM 20061010 10 00 00 84 08 84 19 2 2 12 D BRUTIBM 20061010 10:00:00 84.08 84.19 2 2 12 D BRUTIBM 20061010 10:00:00 84.08 84.15 2 2 12 D BRUTIBM 20061010 10:00:00 84.08 84.15 1 2 12 D BRUTIBM 20061010 10:00:00 84.08 84.12 12 10 12 D NAQSIBM 20061010 10:00:00 84.09 84.13 1 2 12 N IBM 20061010 10:00:00 84.09 84.13 2 2 12 N IBM 20061010 10:00:00 84.08 84.11 12 10 12 D INETIBM 20061010 10:00:00 84.08 84.11 13 10 12 D NAQSIBM 20061010 10:00:01 84.09 84.13 3 2 12 N IBM 20061010 10:00:01 84.08 84.15 2 2 12 D BRUTIBM 20061010 10:00:01 84.08 84.11 14 10 12 D NAQSIBM 20061010 10:00:01 83.33 84.86 1 1 12 X IBM 20061010 10:00:01 84.08 84.19 2 2 12 D BRUTIBM 20061010 10:00:01 84.08 84.16 2 2 12 D BRUTIBM 20061010 10:00:01 84.08 84.16 1 2 12 D BRUTIBM 20061010 10:00:01 84.08 84.11 13 10 12 D NAQSIBM 20061010 10:00:01 84.09 84.19 2 2 12 D BRUTIBM 20061010 10:00:01 84.09 84.11 2 10 12 D NAQSIBM 20061010 10:00:01 84.09 84.13 16 2 12 N IBM 20061010 10:00:01 84.09 84.15 2 2 12 D BRUTIBM 20061010 10:00:01 84.10 84.15 1 2 12 D BRUT

Quote Spreads d h C f T diand the Cost of Trading

Using Quotes to compute either average bid-ask spreads or effective spreadsUsing Quotes to compute either average bid-ask spreads or effective spreads Seller Offers (OFR) > Buyer Bids (BID) = Bid Trade

Range At Offer At Midpoint At Bid Best Offer: 30.50 30.50

30.40

------- |

|

Best Bid: 30.30 |

------- 30.30 Cost of trade– usually measured using Spread = OFR-BID

F ll S d B ff d i di l ll bid (T d l 0 20 / h b ) Full Spread-- Buy at offer and immediately sell at bid (Trade loss: 0.20 / share above) Half Spread-- Buy at mid point and immediately sell at bid or buy at offer and sell at expected price. (Trade loss: 0.10 / share above) Other methods such as Effective Spread and Realized SpreadOther methods such as Effective Spread and Realized Spread require combining Trades with Quotes.

Problems and Potential ‘Gotchas’Problems and Potential GotchasNo permanent stock identifier. SYMBOL is good enough for one day

and usually for the whole month.y

Trade Time delay (controversial, Lee & Ready algorithm)Makes combining and comparing trades and quotes hard (or at least not unambiguous).

Data is ‘dirty’-- as transmittedData is dirty as transmitted.G127, CORR, COND, MODE codes need to be used to get clean trades and quotesQuote BID of .01 cancels out prior quotes.

TAQ Quotes are not the ‘Book’ for the true NNBO.

Split Trades can hide information and trader actions/positions.

Extremely Large & Growing Larger. Combining trades and quotes is especially time consuming (for the WRDS server),g q p y g ( ),especially if different trade delay assumptions are being investigated.

Markets and executive standards are changing.Examples: NYSE is 50% electronic. Quote spreads of 0.01 are common.Any assumptions and conclusions that are based on prior work may be falseAny assumptions and conclusions that are based on prior work may be false.

Joel Hasbrouck’s (NYU) web site and book has useful material such as SAS code and examples using WRDS.

Other Intra-Day Stock Price DataOther Intra Day Stock Price Data ISSM (prior to 1993)TORQ NASTRAQNYSE Open Book and ARCA setsToronto Stock Exchange (TSX) setToronto Stock Exchange (TSX) setAustralian set

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