RT Journal Article
SR Electronic
T1 Measuring Bond-Level Liquidity
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 116
OP 128
DO 10.3905/jpm.2016.42.4.116
VO 42
IS 4
A1 Vadim Konstantinovsky
A1 Kwok Yuen Ng
A1 Bruce D. Phelps
YR 2016
UL https://pm-research.com/content/42/4/116.abstract
AB Market liquidity is important for investors, portfolio managers, and policy makers because it affects decision making and portfolio performance. Yet, for all its importance, liquidity is difficult to measure. Although various approaches to measuring systemic, market-wide liquidity have evolved over time, there have been no reliable security-level metrics. The problem is particularly acute for bonds, many of which trade thinly and mostly over the counter. This article describes a bond-level liquidity measure, Liquidity Cost Score (LCS), that fills this void in the fixed-income investors’ toolbox. LCS is defined as the cost of a standard, institutional-size round-trip transaction. It is expressed as a percentage of a bond’s price and can be aggregated across bonds in a portfolio, as well as compared over time. LCS provides investors with a rigorous and consistent metric and facilitates academic research of market liquidity.TOPICS: Portfolio management/multi-asset allocation, factors, risk premia, security analysis and valuation