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Estimating unobservable valuation parameters for illiquid assets

Estimating unobservable valuation parameters for illiquid assets A problem that often arises in applied finance is one where decision‐makers need to choose a value for some parameter that will affect the cash flows between two parties involved in the operation of an illiquid asset. Because the values of the cash flows also depend on various unobservable parameters, identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task, often resulting in disputes and the invocation of ad hoc approaches. We show how this problem can be solved using an extension of the well‐known ‘implied volatility’ technique from option pricing, and apply it to the determination of equilibrium rental rates on ground leases of commercial land. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

Estimating unobservable valuation parameters for illiquid assets

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References (18)

Publisher
Wiley
Copyright
© The Authors. Journal compilation © 2009 AFAANZ
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/j.1467-629X.2008.00293.x
Publisher site
See Article on Publisher Site

Abstract

A problem that often arises in applied finance is one where decision‐makers need to choose a value for some parameter that will affect the cash flows between two parties involved in the operation of an illiquid asset. Because the values of the cash flows also depend on various unobservable parameters, identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task, often resulting in disputes and the invocation of ad hoc approaches. We show how this problem can be solved using an extension of the well‐known ‘implied volatility’ technique from option pricing, and apply it to the determination of equilibrium rental rates on ground leases of commercial land.

Journal

Accounting & FinanceWiley

Published: Sep 1, 2009

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