Fair Transfer Price

Reinforcement Learning for Corporate Bond Trading: A Sell Side Perspective ArXiv ID: 2406.12983 “View on arXiv” Authors: Unknown Abstract A corporate bond trader in a typical sell side institution such as a bank provides liquidity to the market participants by buying/selling securities and maintaining an inventory. Upon receiving a request for a buy/sell price quote (RFQ), the trader provides a quote by adding a spread over a \textit{“prevalent market price”}. For illiquid bonds, the market price is harder to observe, and traders often resort to available benchmark bond prices (such as MarketAxess, Bloomberg, etc.). In \cite{“Bergault2023ModelingLI”}, the concept of \textit{“Fair Transfer Price”} for an illiquid corporate bond was introduced which is derived from an infinite horizon stochastic optimal control problem (for maximizing the trader’s expected P&L, regularized by the quadratic variation). In this paper, we consider the same optimization objective, however, we approach the estimation of an optimal bid-ask spread quoting strategy in a data driven manner and show that it can be learned using Reinforcement Learning. Furthermore, we perform extensive outcome analysis to examine the reasonableness of the trained agent’s behavior. ...

Liquidity Dynamics in RFQ Markets and Impact on Pricing ArXiv ID: 2309.04216 “View on arXiv” Authors: Unknown Abstract To assign a value to a portfolio, it is common to use Mark-to-Market prices. However, how should one proceed when the securities are illiquid? When transaction prices are scarce, how can one use all the available real-time information? In this article, we address these questions for over-the-counter (OTC) markets based on requests for quotes (RFQs). We extend the concept of micro-price, which was recently introduced for assets exchanged through limit order books in the market microstructure literature, and incorporate ideas from the recent literature on OTC market making. To account for liquidity imbalances in RFQ markets, we use an approach based on bidimensional Markov-modulated Poisson processes. Beyond extending the concept of micro-price to RFQ markets, we introduce the new concept of Fair Transfer Price. Our concepts of price can be used to value securities fairly, even when the market is relatively illiquid and/or tends to be one-sided. ...