Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10489124 | Research in International Business and Finance | 2005 | 14 Pages |
Abstract
We derive a model for the valuation of government bonds subject to liquidation risk. We show that the value of a government bond depends on the term structures of the conditional probability of liquidation facing the portfolio manager, the bid-ask spread, and the riskless rate. We derive an expression for the elasticity of a government bond adjusted for the risk of liquidation with respect to shifts in the riskless term structure of interest rates. Failing to adjust elasticity for liquidation risk may be costly for bond portfolio managers utilizing active, rate-anticipation duration strategies based on Macaulay duration.
Keywords
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Social Sciences and Humanities
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Business and International Management
Authors
Gady Jacoby, Ilona Shiller,