Utility Indifference Discount of Restricted Stock Value

50 Pages Posted: 24 Jan 2007

See all articles by Hai Lin

Hai Lin

Victoria University of Wellington - Te Herenga Waka - School of Economics & Finance

Zhenlong Zheng

Xiamen University - Department of Finance

Date Written: March 10, 2007

Abstract

Many stocks are subject to some kinds of resale restrictions in the financial markets. In this paper, we introduce the short sale constraints into a three asset consumption-portfolio choice model and propose the Utility Indifference Discount (UID) to measure the discount of the restricted stocks. We consider different short sale constraints and study the their impact on the UID of restricted stock. The results could help us understand the economic sense of short sales constraints on the value of restricted stocks and help resolve the argument on the magnitude of discount due to resale restriction.

Keywords: Short sale constraint, Transaction cost, Resale restriction, Utility indifferent discount, Markov decision process

JEL Classification: G1

Suggested Citation

Lin, Hai and Zheng, Zhenlong, Utility Indifference Discount of Restricted Stock Value (March 10, 2007). Available at SSRN: https://ssrn.com/abstract=959052 or http://dx.doi.org/10.2139/ssrn.959052

Hai Lin (Contact Author)

Victoria University of Wellington - Te Herenga Waka - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Zhenlong Zheng

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

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