A Note on fair Value and Illiquid Markets

Dominique Guegan () and Chafic Merhy ()
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Dominique Guegan: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Chafic Merhy: Natixis Asset Management - SAMS

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We present in this paper a method to extract fair prices from observable prices in an illiquid market. The dynamics of fair prices have a general form encompassing random walks. In fact, only a part of a movement in price is assumed to reflect fundamental changes, the rest is considered to be friction. That part is optimally estimated by a Kalman filter". The model allows also to recover liquidity premia as a product of innovations times an illiquidity multiplier. Thus the higher the difference between observed and filtered prices (prices obtained under "normal" market dynamics), the higher liquidity premium will be. The model can be adapted to various kind of instruments and calibrated in different ways.

Keywords: Fair value; illiquid market; Kalman filter; Mark to model.; "fair value"; marchés illiquides; filtrage de Kalman; "Mark to model". (search for similar items in EconPapers)
Date: 2010-01
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00460856v1
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Published in 2010

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Working Paper: A note on fair value and illiquid markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00460856

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