Mid-Price Estimation for European Corporate Bonds: A Particle Filtering Approach

Olivier Guéant and Jiang Pu
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Jiang Pu: Institut europlace de finance

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Abstract: In most illiquid markets, there is no obvious proxy for the market price of an asset. The European corporate bond market is an archetypal example of such an illiquid market where mid-prices can only be estimated with a statistical model. In this OTC market, dealers/market makers only have access, indeed, to partial information about the market. In real time, they know the price associated with their trades on the dealer-to-dealer (D2D) and dealer-to-client (D2C) markets, they know the result of the requests for quotes (RFQ) they answered, and they have access to composite prices (e.g., Bloomberg CBBT). This paper presents a Bayesian method for estimating the mid-price of corporate bonds by using the real-time information available to a dealer. This method relies on recent ideas coming from the particle filtering/sequential Monte Carlo literature.

Keywords: Bayesian filtering; sequential Monte Carlo; mid-price discovery; corporate bonds; requests for quotes (search for similar items in EconPapers)
Date: 2018-06
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Published in Market microstructure and liquidity, 2018, 04 (01n02), pp.1950005. ⟨10.1142/S2382626619500059⟩

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Working Paper: Mid-Price Estimation for European Corporate Bonds: A Particle Filtering Approach (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02862823

DOI: 10.1142/S2382626619500059

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