Bid/Ask Spread, Volatility and Volume in the Corporate Bond Market
Posted: 22 Apr 2002
This paper examines the time-series relationship among volatility, volume and bid-ask spreads for the ten most actively traded bonds on the NYSE's Automated Bond System (ABS). The bonds examined here have a significant percentage of all their trades carried out on the ABS, but retail-sized transactions and time-clustering mandate a data analytic approach that accommodates irregularly spaced quotes. Latent volatility for each bond is extracted using an Autoregressive Conditional Duration (ACD) model that provides input into an ordered probit model for observed spreads. For the most part we find a significant positive (negative) relationship between latent volatility (trading volume proxy) and observed spread and this finding is robust to alternative specifications.
Keywords: ABS market, volatility, volume, bid-ask spreads, ACD model
JEL Classification: G10, C41
Suggested Citation: Suggested Citation