When observing bid/offer in the market I came across a question.
How much trading a bond would impact its spread for subsequent trades ie. what is the impact on bid/offer due to volume/size of recently palced trades.
The size of trades placed in market with impact the liquidity , demand supply , market sentiment etc. I know it is hard to predict how much the spreads will move after a trade /trades of specific size are placed in market. But is there is reasonble assumption that practitioners make ? Any pointers on existing research will be great too .
EDIT : This is indeed a very hard thing to compute. This is not an extensive list of explanatory variables but one can say that –
- Spreads will be inversely related to the market maker's ability to hedge his positions
- Spreads will be directly related to volatility of the security
- Spreads will be directly related size and frequency of quotes from Market makers. Some aggregation using ALL QUOTES of Bloomberg should help us estimate this.
I believe that we can model such a behaviour by
a. Either perturbation based approach such as http://www.maths.univ-evry.fr/prepubli/342.pdf
b. Compound Autoregressive possion’s process.
If I have something worked out , I will share the results. In the meantime if you have methodology that you use as a practitioner please do share .