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Valuing Corporate Securities When the Firm’s Assets are Illiquid

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Abstract

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 corporate security. This asset 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.

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Acknowledgements

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Funding

This paper was supported by two research grants, received separately by the first and third authors from the Natural Sciences and Engineering Research Council (NSERC) of Canada.

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Authors and Affiliations

  1. Department of Decision Sciences, HEC Montréal and GERAD, 3000, ch. de la Côte-Sainte-Catherine, Montréal, QC, H3T 2A7, Canada

    Hatem Ben-Ameur

  2. Faculty of Economics and Management, University of Sfax, Road of the Airport 4, 3018, Sfax, Tunisia

    Tarek Fakhfakh

  3. Finance Department, UQAM, 315, rue Sainte-Catherine Est, Montréal, QC, H2X 3X2, Canada

    Alexandre Roch

Authors
  1. Hatem Ben-Ameur
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  2. Tarek Fakhfakh
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  3. Alexandre Roch
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All the authors contributed equally to this work. All authors read and approved the final manuscript.

Corresponding author

Correspondence to Tarek Fakhfakh.

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Ben-Ameur, H., Fakhfakh, T. & Roch, A. Valuing Corporate Securities When the Firm’s Assets are Illiquid. Comput Econ 63, 579–598 (2024). https://doi.org/10.1007/s10614-022-10352-5

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  • DOI: https://doi.org/10.1007/s10614-022-10352-5

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