Valuing Tradeability in Exponential L\'evy Models
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.
Keywords
Cite
@article{arxiv.1912.00469,
title = {Valuing Tradeability in Exponential L\'evy Models},
author = {Ludovic Mathys},
journal= {arXiv preprint arXiv:1912.00469},
year = {2020}
}