The Journal of Fixed Income · 2009 · 364 citations · 6 references
Empirical FinanceFinancial AnalyticsFinancial EconomicsStatistical MethodsFinancial DataFinancial EconometricsQuantitative FinanceAccounting PolicyLiquidityBusinessLiquidity BiasesUs Corporate BondsManagementBond MarketTransactions Database TraceFinanceFinancial Risk
TRACE is rapidly becoming the standard data source for empirical research on US corporate bonds. The study aims to thoroughly discuss the assumptions needed to clean TRACE data. It recommends using different filters depending on the application. Errors comprise 7.7% of all TRACE reports, with up to 18% requiring deletion, and failing to correct these biases makes liquidity measures appear more liquid, with a median turnover bias of 7.4% and the Amihud price‑impact measure underestimated by at least 14.6%; calculating both measures on the same sample could further bias one of them. Topics include fixed‑income portfolio management, statistical methods, and fixed‑income and structured finance.
The transactions database TRACE is rapidly becoming the standard data source for empirical research on US corporate bonds. This paper is the first to thoroughly discuss the assumptions needed to clean the disseminated TRACE data and to suggest that different filters should be used depending upon the application. 7.7% of all reports in TRACE are errors and in some cases up to 18% of the reports should be deleted. Failing to correct for these errors will bias popular liquidity measures towards a more liquid market. The median bias for the daily turnover will be 7.4% and for a quarter of the bonds the Amihud price impact measure will be underestimated by at least 14.6%. Further, calculating these two measures on the same data sample would potentially bias one of them. <b>TOPICS:</b>Fixed-income portfolio management, statistical methods, fixed income and structured finance
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