Fixed Income materiality
Hey guys. I am currently in the process of building of a pricing process that determines materiality between vendor sources on fixed income asset classes: plain vanilla corps, High Yield, Munis, and structured
To give you an idea: Vendor A prices corp bond XYZ at 101 and Vendor B prices bond XYZ at 101.25. How do we know if that difference is material? And that's basically the driver in the first phase of this, determining when the difference warrants a red flag. I am trying to make this a moving tolerance level. I have played around with a few statistical measures like a Z-Score and financial measures like the Treasury rate based on the maturity of each security.
If the difference is wider than bid/offer, i.e. you could cross the two dealers if you wanted to, it's material. You don't need no sophisticated model.
Thanks Martinghoul. I was afraid I was outsmarting myself, but that definitely makes sense to just use the bid-ask. Do you think any type of adjustments should be made based on the liquidity/confidence scores provided. Our secondary vendor provides similar rankings based on what Bloomberg offers in their bval function. I wonder if it's necessary to add a little more to the spread if the liquidity/confidence score is lower.
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