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G-2018-68

Valuing corporate securities when the firm's assets are illiquid

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We use stochastic dynamic programming to design and solve an extended structural setting for which the illiquidity of the firm's assets under liquidation is interpreted as an intangible asset. This corporate security tends to reduce bond values, augment yield spreads, and, thus, partially explain the credit-spread puzzle. To assess our construction, we provide a sensitivity analysis of the values of corporate securities with respect to the illiquidity parameter.

, 14 pages

This cahier was revised in March 2021

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G1868RR.pdf (7 MB)