Occam’s Razor for Bond Trade Costs

Inability to accurately project transaction cost is one of the main drags on alpha and performance for bond investors. We introduce a framework for bond trade cost analysis that reflects bond characteristics as well as order information. This framework leverages historical and real-time data to deliver solid explanatory power. The authors goal is to help buy-side traders and dealers to build liquidity trees, while assisting portfolio managers to make investment decisions that include trade costs. We lean on 20 years of experience modeling transaction cost for equities, as well as intimate knowledge of the bond market microstructure. Our work covers investment grade and high yield corporate bonds, issued in USD, EUR, and GBP, as well as government bonds in developed and emerging markets globally.