Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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estimated using this maximum price should be the outer
bound for the value of illiquidity.
33 Using this approach, Longstaff estimates how much
marketabilitywouldbeworthasapercentofthevalueofan
assetfordifferentilliquidityperiodsandassetvolatilities.The
results are graphed inFigure 14.3.


FIGURE 14.3 Upper Bounds on Marketability
Discount—Option Pricing Model


Source:Longstaff (1995).


Itisworthemphasizingthattheseareupperboundsonthe
valueofilliquiditysinceitisbasedontheassumptionofa
perfectmarkettimer.Totheextentthatinvestorsareunsure
aboutwhenanassethasreacheditsmaximumprice,thevalue
ofilliquidity willbe lower thantheseestimates.Themore
generallessonswillstillapply.Thecostofilliquidity,stated

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