Sample interview questions: How do you assess the liquidity risk of fixed income securities?
Sample answer:
Assessing Liquidity Risk of Fixed Income Securities
1. Market Depth and Breadth:
- Examine the bid-ask spread: Narrow spreads indicate high liquidity.
- Analyze trading volume: Higher trading volumes suggest greater liquidity.
- Consider the number of market makers participating in the security.
2. Price Impact Analysis:
- Estimate price volatility during normal vs. stressed market conditions.
- Quantify the potential price decline resulting from specified trading volumes.
- Use tools like the Liquidity Adjusted Value (LAV) metric to assess the impact of liquidity on pricing.
3. Time-Weighted Average Price (TWAP):
- Calculate the average execution price of a trade dispersed over a specified time period.
- TWAP execution minimizes price impact by spreading the order over multiple trading sessions.
4. Information Dissemination:
- Evaluate the availability and timeliness of relevant market data.
- Assess the frequency of price updates and the accuracy of order flow information.
5. Market Structure Analysis:
- Identify any structural factors affecting liquidity, such as regulation, market fragmentation, or concen… Read full answer
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