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A closed formula for illiquid corporate bonds and an application to the European market

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  • Baviera, Roberto
  • Nassigh, Aldo
  • Nastasi, Emanuele

Abstract

How to price illiquid corporate bonds when their prices are not available for several days in the marketplace, but other bonds of the same issuer trade frequently? This situation appears to be quite common in the fixed income market: it is rather usual to find issuers that, besides liquid benchmark bonds, issue some other debt instruments that either are placed to a small number of investors in private placements or have a limited issue size. To answer to this question we propose an option approach for pricing bond illiquidity that is reminiscent of the celebrated work of Longstaff (1995) on the non-marketability of some non-dividend-paying shares in IPOs.

Suggested Citation

  • Baviera, Roberto & Nassigh, Aldo & Nastasi, Emanuele, 2021. "A closed formula for illiquid corporate bonds and an application to the European market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000020
    DOI: 10.1016/j.intfin.2021.101283
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    More about this item

    Keywords

    Corporate coupon bonds; Liquidity; Time-to-liquidate;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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