st: event study

[Andrew Reed <drew.reed1@gmail.com>]

Dear Statalisters,

I am implementing an event study methodology so as to judge whether credit rating news announcements affect 9 exchange rates for 72 entities. I am currently wondering how to best go about create event windows for the following event windows: 

[-1,+1]
[-1,+3]
[-1,+7]

I want to measure the change in the dependent variable of my specification, i.e. the change in the natural logarithm of entity i's exchange rate in the previous three windows, surrounding an event, where the event occurs at t=0. 

My specification is the following.

d.EX_i,s = a0 + a1_upgrade_i,t + a2_downgrade_i,t + a3_credit rating_i,t + a4_bond spread_t + error

Where I get confused is how to do this. At first I thought I would just have a full measure of the change in exchange rates and then, for example with the [-1,+1] window, I would just augment the actual event in order to account for this. Let's use the following example, using completely arbitrary numbers, but looking at a downgrade at date 3.

date  d.ex    downgrade
1        +0.5		0
2	  +0.5		1
3        -0.4		1
4        -0.3		1
5        +0.2		0
6        +0.4		0

So the dummy for downgrade establishes the window. After talking with a friend I'm not sure this works. We have thus contemplated using a dummy variable, much like the downgrade variable just seen, in order to establish the window with the exchange rate variable itself. In multiplying this binary variable with the d.ex variable and just counting a downgrade as happening at date 3, the observations would look like the following:

date   event[-1,+1]   (d.ex)*(event[-1,+1])		downgrade
1		0				0					0
2		1				+0.5				0
3		1				-0.4					1
4		1				-0.3					0
5		0				0					0
6		0				0					0

I hope this makes sense. This is the last hurdle I need to clear before running regressions for a final writeup of results. Any input is helpful and I thank you beforehand for your thoughts.

Best,

Drew


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