Default-risky bond prices with jumps, liquidity risk and incomplete information (Q2477606)

This paper provides a default-risky bond valuation model, assuming that the issuer's credit quality, modelled by the intensity of default, is driven by a continuous time Markov chain. It is also assumed that market and credit risk are independent In this setting, the paper characterizes the risk bond price in terms of a semimartingale representation, which separate three types of risks: default, interest-rate and credit quality. The illiquidity is modelled as exogenously specified stochastic reduction in the price of the bond, which adds more risks for the investores. A model of a market with partially informed investors was specified. Valuations of defaultable bonds in this market were provided as well as impacts of new information releases.