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

Roberto Baviera, Aldo Nassigh and Emanuele Nastasi

Journal of International Financial Markets, Institutions and Money, 2021, vol. 71, issue C

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.

Keywords: Corporate coupon bonds; Liquidity; Time-to-liquidate (search for similar items in EconPapers)
JEL-codes: C51 G12 H63 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000020

DOI: 10.1016/j.intfin.2021.101283

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