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arXiv · 1912.00469

Valuing Tradeability in Exponential L\'evy Models

Ludovic Mathys
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Abstract

The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential L\'evy 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.

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Ludovic Mathys. 2019-12-01. Valuing Tradeability in Exponential L\'evy Models. https://arxiv.org/abs/1912.00469

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