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Liquidity on value – part two
An important component of liquidity is the ability to realise an investment rapidly. In the June edition of the newsletter, we looked at the implications for the investor if that quality is not present and one of those implications is that innate volatility should be a determinant of the illiquidity discount.
He has presented his findings in a complex formula with volatility and lockout period as inputs, all built on the formula for a normal distribution. This is known as the Longstaff lookback option. This, together with a detailed exposition of its use in practice, is available in a paper entitled, New Insight into Calculating Discounts for Lack of Marketability.
This is promoted as being a scientific means of reducing the speculation of the appropriate discount for lack of marketability. However, some are horrified at this thought and offer the following challenges.