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Empirical Research

VFC’s proprietary DLOM calculator combines probability-based time and price volatility variables in conjunction with the Longstaff, Black-Scholes, and Finnerty option formulas to yield highly refined, objectively determined DLOM estimates that are valuation-date specific.

Introduction by Francis A. Longstaff, Ph.D.

The question of how to value illiquid investments that cannot be traded continuously is one of the most challenging issues facing academic researchers and industry practitioners. The reason for this is that the lack of marketability takes us well outside standard paradigms in financial economics such as the notion of efficient markets, portfolio choice, and the usual risk and return tradeoffs that underlie much of modern investment theory.

Marc Vianello’s book “Empirical Research Regarding Discounts for Lack of Marketability” is an impressive effort to bring a rigorous and comprehensive data-based perspective to addressing these issues. The book begins with a thorough review of the historical research on the topic and provides valuable insights about the scope and reliability of the evidence. The book then moves on to an insightful analysis of the strengths and weaknesses of existing models of the discount for lack of marketability. What makes this analysis particularly valuable is the depth of knowledge and practical experience the author brings to the task. Finally, the book offers a number of carefully considered extensions to existing models, demonstrates how these can be implemented in practice, and evaluates their performance using objective empirical standards.

This book makes great strides in helping us understand the nature of the discount for lack of marketability phenomenon and offers us valuable perspectives on how to address the associated challenges of valuation.

Francis A. Longstaff, Ph.D.
Allstate Chair in Insurance and Finance
Anderson School of Management
University of California at Los Angeles