Abstract
The liquidity of financial instruments has always taken a prominent place in financial research.Compared to the studies of equities and exchange-traded bonds, estimating an OTC-traded bond's liquidity premium has not been fully understood. OTC bonds are usually less frequently traded, which results in insufficient data, therefore, most current methodologies cannot be efficiently used.
The question is: how is the liquidity premium of OTC bonds decided? Can we find an easier way to assess or estimate the liquidity premium of a bond lacking transaction or quotation data?
Based on two main research methods, the existing multi-factor regression and the instrument pair analysis, our research applies a "bond pair" method to study the relationship between bond liquidity factors and liquidity prices. This thesis studies the comparative "difference" of the liquidity factors and premium of a pair of bonds, avoiding the need for a large amount of data, and proposes a solution for the similar data lacking question. As a conclusion, our result shows that at a specific cross-sectional time, the bond issuing amount size and the life length have significant impacts on comparative bond liquidity premium, but the cash flow structure and credit rating (limited to investment-grade bonds) have a relatively small impact. It is also found that the issuing amount dominantly determines the bid-ask spread premium when a bond is close to maturity. We suggest the following research direction in the last, and a feasible estimation method is proposed for quotation considering liquidity premium. The potential advantage is that there is no need to consider and collect a large amount of data, avoiding potential data problems.
Keywords: OTC bond, Liquidity, Pair analysis
| Date of Award | 1 Jun 2023 |
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| Original language | English |
| Awarding Institution |
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| Supervisor | Alex Preda (Supervisor) & Zhong Chen (Supervisor) |