25 Pages Posted: 16 Aug 2016 Last revised: 24 Sep 2017
Date Written: September 1, 2017
Theoretical models that estimate marketability discount assume that securities are continuously traded in unlimited quantities. In practice, many securities exhibit low trading frequency. We generalize the theoretical models using a method in which the frequency and the limit on the traded quantity are considered, and estimate its impact on marketability discount. We show that accounting for the illiquidity of a security may significantly reduce its marketability discount. Further, we show that our method reconciles the approaches to estimating marketability discount of Longstaff (1995) and Finnerty (2012a), by showing that the two are corner and special solutions of our generalized method.
Keywords: Marketability, liquidity, thin-traded security
JEL Classification: G01, G12, G13
Suggested Citation: Suggested Citation
Abudy, Menachem (Meni) and Binsky, Hadar and Raviv, Alon, Marketability Discount of Thin-traded Securities (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=2823584