Practical Applications of Measuring Bond-Level Liquidity

Abstract

Liquidity has been a hot topic in recent years for investors, regulators, and economists. Accordingly, it has been the subject of countless papers, debates, round table discussions, and conference panels. And yet with all the attention focused on liquidity, no one has been able to measure it effectively.

In Measuring Bond-Level Liquidity, published in The Journal of Portfolio Management (Summer 2016), Vadim Konstantinovsky, Kwok Yuen Ng and Bruce Phelps of Barclays examine this issue in the specific context of the bond markets, which historically have not been as transparent or liquid as the mainstream equity markets. The authors introduce a Liquidity Cost Score (LCS) metric, which is a quantitative, bond-level, liquidity measure. The team uses LCS to analyze liquidity in the corporate bond market from 2007 to the present, and illustrate the value of having a rigorous, quantitative liquidity measure to better assess bond market dynamics.