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The Journal of Fixed Income

The Journal of Fixed Income

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Article

Liquidity Biases in TRACE

Jens Dick-Nielsen
The Journal of Fixed Income Fall 2009, 19 (2) 43-55; DOI: https://doi.org/10.3905/jfi.2009.19.2.043
Jens Dick-Nielsen
is a doctoral student at the Department of Finance at the Copenhagen Business School in Frederiksberg, Denmark. jdn.fi@cbs.dk
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Abstract

The transactions database TRACE is rapidly becoming the standard data source for empirical research on US corporate bonds. This paper is the first to thoroughly discuss the assumptions needed to clean the disseminated TRACE data and to suggest that different filters should be used depending upon the application. 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%. Further, calculating these two measures on the same data sample would potentially bias one of them.

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The Journal of Fixed Income: 19 (2)
The Journal of Fixed Income
Vol. 19, Issue 2
Fall 2009
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Liquidity Biases in TRACE
Jens Dick-Nielsen
The Journal of Fixed Income Sep 2009, 19 (2) 43-55; DOI: 10.3905/jfi.2009.19.2.043

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Liquidity Biases in TRACE
Jens Dick-Nielsen
The Journal of Fixed Income Sep 2009, 19 (2) 43-55; DOI: 10.3905/jfi.2009.19.2.043
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    • Reporting Errors
    • Error Filter
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