Bid/Ask Spread, Volatility and Volume in the Corporate Bond Market

Posted: 22 Apr 2002

See all articles by Madhu Kalimipalli

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Arthur Warga

University of Houston - Department of Finance

Abstract

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

Kalimipalli, Madhu and Warga, Arthur, Bid/Ask Spread, Volatility and Volume in the Corporate Bond Market. The Journal of Fixed Income, March 2002. Available at SSRN: https://ssrn.com/abstract=300664

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

HOME PAGE: http://www.madhukalimipalli.com/

Arthur Warga (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4779 (Phone)
713-743-4789 (Fax)

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