Stylized Facts on Price Formation on Corporate Bonds and Best Execution Analysis
36 Pages Posted: 19 Apr 2019
Date Written: March 21, 2019
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: Suggested Citation