A note on fair value and illiquid markets

Dominique Guegan () and Chafic Merhy ()
Additional contact information
Dominique Guegan: Centre d'Economie de la Sorbonne - Paris School of Economics, https://cv.archives-ouvertes.fr/dominique-guegan
Chafic Merhy: Natixis Asset Management - SAMS

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

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 (search for similar items in EconPapers)
JEL-codes: C1 G10 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2010-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://mse.univ-paris1.fr/pub/mse/CES2010/10001.pdf (application/pdf)

Related works:
Working Paper: A Note on fair Value and Illiquid Markets (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:10001

Access Statistics for this paper

More papers in Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Label ().