| Abstract: |
To assign a value to a portfolio, it is common to use Mark-to-Market prices.
But how to proceed when the securities are illiquid? When transaction prices
are scarce, how to use other available real-time information? In this article
dedicated to corporate bonds, we address these questions using an extension of
the concept of micro-price recently introduced for assets exchanged on limit
order books in the market microstructure literature and ideas coming from the
recent literature on OTC market making. To account for liquidity imbalances in
OTC markets, we use a novel approach based on Markov-modulated Poisson
processes. Beyond an extension to corporate bonds of the concept of
micro-price, we coin the new concept of Fair Transfer Price that can be used
to value or transfer securities in a fair manner even when the market is
illiquid and/or tends to be one-sided. |