Valuing Tradeability in Exponential Lévy Models

37 Pages Posted: 8 Nov 2019

See all articles by Ludovic Mathys

Ludovic Mathys

University of Zurich - Department of Banking and Finance

Date Written: November 6, 2019

Abstract

The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential Lévy type. We consider non-tradeability as a particular type of market illiquidity and investigate its impact on the price of the assets. Starting from an adaption of the continuous-time optional asset replacement problem initiated by McDonald and Siegel (1986), we derive tradeability premiums and subsequently characterize them in terms of free-boundary problems. This provides a simple way to compute non-tradeability values, e.g. by means of standard numerical techniques, and, in particular, to express the price of a non-tradeable asset as a percentage of the price of a tradeable equivalent. Our approach is illustrated via numerical examples where we discuss various properties of the tradeability premiums.

Keywords: Tradeability, Liquidity, Exponential Lévy Processes, Real Options, Maturity Randomization, Optimal Stopping, Free-Boundary Problems

JEL Classification: C32, G12, G13

Suggested Citation

Mathys, Ludovic, Valuing Tradeability in Exponential Lévy Models (November 6, 2019). Available at SSRN: https://ssrn.com/abstract=3482080 or http://dx.doi.org/10.2139/ssrn.3482080

Ludovic Mathys (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

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