Arora, R.; Mehra, R. Proposing Credit- and Sensitivity-Risk-Based Methodology to Address Corporate Bond Illiquidity Problem. J. Risk Financial Manag.2023, 16, 388.
Arora, R.; Mehra, R. Proposing Credit- and Sensitivity-Risk-Based Methodology to Address Corporate Bond Illiquidity Problem. J. Risk Financial Manag. 2023, 16, 388.
Arora, R.; Mehra, R. Proposing Credit- and Sensitivity-Risk-Based Methodology to Address Corporate Bond Illiquidity Problem. J. Risk Financial Manag.2023, 16, 388.
Arora, R.; Mehra, R. Proposing Credit- and Sensitivity-Risk-Based Methodology to Address Corporate Bond Illiquidity Problem. J. Risk Financial Manag. 2023, 16, 388.
Abstract
The current study explores the problem of illiquidity in the corporate bond market and examines a broad set of liquidity proxies through empirical investigation. Purpose: The purpose of this paper is to give solution to the global issue of illiquidity in the corporate bond market. The problem is identified by many researchers and this paper attempts to find out the viable solution of the "fungibility route" as an alternative to the "liquidity route". Design/ Methodology: An Analysis of a sample size of 2,34,772 trade data of corporate bonds and a sample size of 2,00,607 trade data of G-securities is done to identify the problem. Findings / Solution proposed: A mathematical model based on credit risk differential and sensitivity differential is proposed to find out the fair value at which an illiquid bond can be swapped by a liquid bond. To arrive at the fair value of the illiquid bond, we have calculated risk adjusted discount rate using modified duration and credit risk differential. With our solution, it is possible to enhance the liquidity of the bond not directly but through fungibility route. Originality: the research is first of its kind in which solution is given to the global problem of corporate bond illiquidity. To execute the trade in the fungibility route, proposed parties involved are the Fungibility platform, the initiator, and the bidder. The derived fair value would facilitate trade and serve as an exit strategy for illiquid bond holders worldwide.
Keywords
Corporate Bond market; Bond Liquidity; Secondary bond market; Credit Risk; Modified Duration
Subject
Business, Economics and Management, Finance
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
