Valuation of Liquidity Discount: An Option-Theoretical Approach

It introduced an option-theoretical approach to value illiquidity security discount, taking an empirical study about the close-end fund discount for example. The empirical results show that illiquidity can´t be a main reason of CEF puzzle in china. However, the empirical research shows it is practical by using lookback option approach to evaluate illiquidity security discount. This approach can help governor and investors to get valuable information. Firstly, the analytical bounds on the value of illiquidity provides useful information for making policy decisions. Secondly, it provides reasonable exchange price for investors.