Transaction cost analytics for corporate bonds

DOI10.1080/14697688.2022.2054723MaRDI QIDQ5092645zbMATH OpenOpenAlexFDO

Authors Xin Guo, Charles-Albert Lehalle, Renyuan Xu

Publication date 22 July 2022

Published in Quantitative Finance (Search for Journal in Brave)

Copyright license Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International

Full work available at URL https://arxiv.org/abs/1903.09140

zbMATH Keywords

bond liquiditydata-driven decision makingenhanced TRACEprice impactregression analysisregularization methodtransaction costs analysis

Mathematics Subject Classification ID

Corporate finance (dividends, real options, etc.) (91G50)

Abstract: The electronic platform has been increasingly popular for executing large corporate bond orders by asset managers, who in turn have to assess the quality of their executions via Transaction Cost Analysis (TCA). One of the challenges in TCA is to build a realistic benchmark for the expected transaction cost and to characterize the price impact of each individual trade with given bond characteristics and market conditions. Taking the viewpoint of retail investors, this paper presents an analytical methodology for TCA of corporate bond trading. Our analysis is based on the TRACE Enhanced dataset; and starts with estimating the initiator of a bond transaction, followed by estimating the bid-ask spread and the mid-price dynamics. With these estimations, the first part of our study is to identify key features for corporate bonds and to compute the expected average trading cost. This part is on the time scale of weekly transactions, and is by applying and comparing several regularized regression models. The second part of our study is using the estimated mid-price dynamics to investigate the amplitude of its price impact and the decay pattern of individual bond transaction. This part is on the time scale of each transaction of liquid corporate bonds, and is by applying a transient impact model to estimate the price impact kernel using a non-parametric method. Our benchmark model allows for identifying abnormal transactions and for enhancing counter-party selections. A key discovery of our study is the price impact asymmetry between customer-buy orders and consumer-sell orders.

Recommendations

• Real-time market microstructure analysis: online transaction cost analysis
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Cites work

• Cross-impact and no-dynamic-arbitrage
• Least squares after model selection in high-dimensional sparse models
• Linear models for the impact of order flow on prices. I. History dependent impact models
• No-dynamic-arbitrage and market impact
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Cited in

(3)

• Informed trading and momentum in the corporate bond market
• Secondary Market Transparency and Corporate Bond Issuing Costs
• Real-time market microstructure analysis: online transaction cost analysis

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