Default-Risky Bond Prices with Jumps, Liquidity Risk and Heterogeneous Investors

This paper develops a default-risky bond pricing model, which assumes that the default intensity is driven by a Markov chain and which accounts for default and liquidity risk. A representation of the bond price dynamics, which separates three different types of risk, was obtained. Introducing the risk of systematic changes in the market liquidity added more risks. A model of a market with heterogeneously informed investors, having access to discrete information filtrations, was specified and valuation of a default-risky bond in this market was provided.