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Oct 21

Biases in TRACE Corporate Bond Data

Posted by abiao at 10:19 | Code » Other | Comments(0) | Reads(11227)
This post is for those researchers using TRACE US corporate bond data as me. NASD introduced TRACE (Trade Reporting and Compliance Engine) in July 2002 in an effort to increase price transparency in the U.S. corporate debt market. The system captures and disseminates consolidated information on secondary market transactions in publicly traded TRACE-eligible securities (investment grade, high yield and convertible corporate debt) - representing all over-the-counter market activity in these bonds.

However the more I use the data, the more I realize its problem, one of the big issues is the repetitive order with the same amount and price, which definately brings trouble when the data is used for trading volume calculation, such as for Amihud's liquidity measure. Besides the duplicate issue, reversals & the same-day corrections are two major errors of TRACE data, as noted in the paper Liquidity biases in TRACE by Jens Dick-Nielsen,
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%.

Should you are also worried about these issues, I suggest you to read the paper Liquidity biases in TRACE and contact the author for the SAS programming code used for filtering.

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