Posted by
Marco Ottolino on
Aug 31, 2005; 6:39am
URL: http://quantlib.414.s1.nabble.com/Corporate-bond-pricing-within-liquidity-tp4009p4011.html
Corporate bond pricing within liquidity
Chiara,
the additive illiquidity premium depends on how
illiquid is the bond.
You should consider if there are other bonds with same
maturity, if other bond with same payout, if there is a market for bond like
yours and so on....
But anyway there is not a model to price it.
You have to check prices on market. I mean: at least if
you want to know price for a bond without a market, the only thing to do
is to ask to ones who sold it.
So the price will be his price. This is the
point.
Despite this, looking on Bloomberg for spread between
bond with a lot of contributors and bond with a few contributors you could be
able to approximate illiquidity premium. But illiquidity premium is
not linear to illiquidity!!
Hi Marco,
thank you for your answer.
You've just described more or less what I'm already doing to contruct
the term structure of single issuer credit spreads. What I'm looking for now is
the amount of bps I have to add to this the term structure of credit spreads
(obtained from well contributed bond on Bloomberg) to proxy the illiquidity
premium you have to pay for not contributed bond, which should be greater than
the corresponding spread you obtain from contributed bond on
Bloomberg.
Do you have any suggestions on the way to estimate this additive
illiquidity premium in terms of z-spread?
Thank you
Chiara
Hi Chiara,
we use to price illiquid bond this way: we
price & discount bonds at zero rates
from zero curve without spread adjustment.
Then we add spread (you can consider it as a fixed rate
bond with same maturity of the illiquid you want to price).
In order to compute the right credit spread you can
look at info provider prices on a bond similar in term of maturity and payout to
yours. On bloomberg with "DDIS" look at debt distribution of your issuer, find a
bond similar to yours then look at "ALLQ" prices, price this bond and find the
right spread in order to reach bid prices on ALLQ. This is the spread you have
to add to your illiquid bond. This is a proxy.
At least the real price (and so credit spread) for
illiquid bond is the price that who sold it is now able to pay to buy
it.
Hi,
I'm looking
for some smart solution to estimate and express illiquidity premium in term of a
zero-spread which can be added to the term structure of single issuer credit
spreads in order to price illiquid bond.
I will appreciate very much any indication this
question: papers, suggested readings, experience on this field.
Thank you
Chiara