Corporate bond liquidity and trading mechanisms

The corporate bond market (which companies use to issue debt to finance operations) houses securities that are far more heterogenous than other markets, with bonds varying not only in risk but also in maturity, covenant language, callability and multiple other distinguishing features. This, combined with the over-the-counter (OTC) nature of the market and the relative lack of retail investors significantly undermines their liquidity. The liquidity of corporate bonds has therefore been the subject of significant academic and regulatory purview. Over-the-counter trading in corporate bonds typically take place either bilaterally (by “voice” or instant message) or electronically (multi-dealer request for quote auction) with transactions being recorded in TRACE offering data for academic study.

Robeco’s Quant Fixed Income team has access to the TRACE dataset appended with additional trade information from its own transactions. This offers both more insight into the mechanism behind transactions and also increases the potential for modelling the liquidity of bonds conditional on their features and market conditions at the time of trade.

The project covers the entire quant model development cycle: processing and analyzing data, modelling liquidity, analyzing the results, discussing results with researchers, portfolio managers and traders, writing a research report and giving a presentation. This project is supervised jointly by experienced professionals from the trading desk, portfolio management and research teams. Creative, analytic and programming skills are essential in order to successfully complete the project.

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Hendershott and Madhavan (2015) “Click or call? Auction versus search in the over-the-counter market”, Journal of Finance, 70(1), 419-447.

Li and Schürhoff (2019) “Dealer networks”, Journal of Finance, 74(1), 91-144.