A Note on fair Value and Illiquid Markets

Dominique Guegan; Chafic Merhy

halshs-00460856, version 1

A Note on fair Value and Illiquid Markets

Dominique Guegan () ^1, 2, Chafic Merhy () ³

Documents de travail du Centre d'Economie de la Sorbonne - 2010.01 - ISSN : 1955-611X (2010)

Résumé : 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.

1 : Centre d'économie de la Sorbonne (CES)
CNRS : UMR8174 – Université Paris I - Panthéon-Sorbonne
2 : Ecole d'Économie de Paris - Paris School of Economics (EEP-PSE)
Ecole d'Économie de Paris
3 : Natixis Asset Management
SAMS

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Soumis le : Mardi 2 Mars 2010, 16:25:57
Dernière modification le : Mercredi 3 Mars 2010, 09:44:34

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%F halshs-00460856, version 1
%0 Unpublished Work
%U http://halshs.archives-ouvertes.fr/halshs-00460856
%T A Note on fair Value and Illiquid Markets
%A Guegan, Dominique
%A Merhy, Chafic
%+ Centre d'économie de la Sorbonne - CES , Ecole d'Économie de Paris - Paris School of Economics - EEP-PSE , Natixis Asset Management
%G Anglais
%X 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.
%X Nous présentons dans ce papier une méthode permettant d'extraire le "vrai" prix d'un actif à partir des prix observés, dans un marché illiquide. La dynamique proposée des "vrais" prix contient la marche aléatoire comme cas particulier. La dynamique proposée suppose que le prix observé ne reflète qu'en partie les fondamentaux, le reste étant dû à des frictions. Le modèle est estimé à l'aide du filtre de Kalman. L'approche fournit un indicateur d'illiquidité.
%2 SHS:ECO;SHS:GESTION;SHS:STAT;MATH:MATH_PR;MATH:MATH_ST;STAT:TH
%8 2010-01-00
%Z Documents de travail du Centre d'Economie de la Sorbonne - 2010.01 - ISSN : 1955-611X
%K Fair value, illiquid market, Kalman filter, Mark to model.
%K "fair value", marchés illiquides, filtrage de Kalman, "Mark to model".
%2 C - Mathematical and Quantitative Methods/C1 - Econometric and Statistical Methods: General, G - Financial Economics/G1 - General Financial Markets/G10 - General
%Z URL des Documents de travail : http://ces.univ-paris1.fr/cesdp/CESFramDP2010.htm