Estimating expected losses and liquidity discounts implicit in debt prices

Trading Credit Default Swaps via Interdealer Brokers

“…Recent literature has investigated the liquidity premium in bond spreads(Janosi et al 2002;, while credit default swaps are modeled to have no liquidity premium due to several reasons Longstaff et al (2005). provide the most comprehensive discussion on the issue, noting that CDS are contracts that can be set up arbitrarily, while securities are fixed in supply.…”

Default-risky bond prices with jumps, liquidity risk and incomplete information

“…Duffie and Singleton (1999) and Jarrow and Turnbull (2000) suggest that a mathematical model for liquidity effects in the form of some stochastic process describing the carrying costs of the risky bond is desirable. Jarrow and Turnbull (2000) and Janosi et al (2002) state that the price of an illiquid bond P d (t, T ) can be written as a product of exponential liquidity discount factor with the price of the same bond in a liquid market P d (t, T ):…”

Distressed debt prices and recovery rate estimation

“…Similar to Bakshi, Madan, Zhang [5], Janosi, Jarrow and Yildirim [14], and Das and Hanouna [10]) we formulate and estimate a new recovery rate process useful for pricing distressed debt. Our model is shown to provide a good …t to the market prices of distressed debt.…”

“…If the industry recovery rates are biased or misspeci…ed, 1 then these results can not be accepted as valid. Lastly, there are a few papers that use pre-default risky debt or credit default swap (CDS) pricing models to infer the embedded recovery rate (see Bakshi, Madan, Zhang [5], Janosi, Jarrow and Yildirim [14], and Das and Hanouna [10]). These papers are not dependent on the validity of the industry recovery rate estimates.…”