Stylized Facts on Price Formation on Corporate Bonds and Best Execution Analysis

36 Pages Posted: 19 Apr 2019

See all articles by Xin Guo

Xin Guo

University of California, Berkeley - Department of Industrial Engineering and Operations Research

Charles‐Albert Lehalle

Capital Fund Management

Renyuan Xu

University of California, Berkeley - Department of Industrial Engineering and Operations Research

Date Written: March 21, 2019

Abstract

The goal of this paper is to establish a benchmark for transaction cost analysis in bond trading for retail investors. Investors can use this benchmark to improve decisions when requesting quotes from dealers on electronic platforms. This benchmark is constructed in two steps. The first step is to identify abnormal trades by approximating the market liquidity using different statistical regression methods: OLS, two-step LASSO and Elastic Net. The second step is to estimate the amplitude and the decay pattern of price impact using non-parametric methods. A key discovery is the price impact asymmetry between customer-buy orders and costumer sell orders: customer buy orders have a larger price impact than customer sell orders. We show that this asymmetry is statistically significant.

Keywords: Bond liquidity, transaction costs analysis, riskless principal trades, price impact, Enhanced TRACE

JEL Classification: G12, G19, G24, G28

Suggested Citation

Guo, Xin and Lehalle, Charles‐Albert and Xu, Renyuan, Stylized Facts on Price Formation on Corporate Bonds and Best Execution Analysis (March 21, 2019). Available at SSRN: https://ssrn.com/abstract=3357789 or http://dx.doi.org/10.2139/ssrn.3357789

Xin Guo

University of California, Berkeley - Department of Industrial Engineering and Operations Research ( email )

4141 Etcheverry Hall
Berkeley, CA 94720-1777
United States

Charles‐Albert Lehalle

Capital Fund Management

23 rue de l'Université
Paris, 75007
France

Renyuan Xu (Contact Author)

University of California, Berkeley - Department of Industrial Engineering and Operations Research ( email )

4141 Etcheverry Hall
Berkeley, CA 94720-1777
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
126
PlumX Metrics