Measuring liquiduity of a portoflio of bonds

Question

I'm currently looking into applying bond liquidity out of curiousity.

The Method i'm currently using is the Barclays LCS score (live.barcap.com/publiccp/RSR/nyfipubs/barcap-email-mkting/qps/LCS_In-brief.pdf)

which states that a possible way to grade a bond liquidity is simply

$Ask-Bid/Bid$

What I do is I measure the spread

$Ask-Bid $

This is the part where I'm doubting i'm going the correct way.

I take a total of the entire spread and divide it by the spread of each asset to get a weighted number.

This weighted number is then multiplied by the LCS Score.

$(Ask-Bid/Bid)*LCS$

My question is if this is a good way to determine liquidity with the limited means I have.

Thank you in advance for any comment/help you can provide.

Answer 1

It does not take into consideration the fact that liquidity is not symmetric, also in Fixed Income markets. Indeed, there is much more liquidity pressure on the downside than on the upside. I suggest you reading liquidity black-holes. as a general rule, corproate bonds are not very liquid compared to DM sovereign ones. Looking at Ahimud allows to take into account Volumes, as well as you can modify it to account for asymmetry above described. A general proxy is DTS, as liquidity is somehow priced into spreads.