Work detail

Valuation of financial instruments (e.g. in the context of market liquidity)

Author: Bc. Jana Veselá
Year: 2017 - summer
Leaders: Mgr. Luboš Hanus
Consultants:
Work type: Bachelors
Language: Czech
Pages: 48
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/164909/
Abstract: This work deals with liquidity as an important parameter, which influences a value of
financial instruments. At the beginning it introduces the theory of liquidity and three different
approaches how it can be perceived. This work I mainly focuses on approach which sees the
lack of liquidity as a certain deduction from estimated value of an asset, in other words as an
illiquidity discount. It also focuses on the value of liquidity and since every asset is actually
liquid, because it can be sold at any time, they differ from each other by the level of liquidity.
This value of liquidity is then reflected as transaction costs, where less liquid assets are
characterized by lower costs. Transactions costs consist of explicit costs, bid-ask spread, price
impact and opportunity costs. Illiquidity discount reflects the value of these costs and can be
observed as a difference between the prices of liquid and illiquid assets. This difference can
be measured in two ways. The first is by looking at restricted stock studies and the other is by
looking at initial public offering studies. In order to find out the value of illiquidity discount
this work uses data concerning restricted stocks. It comes to conclusion that illiquidity
discount is affected by the size of company and its financial stability, by the block size of
trading asset, by liquidity of assets owned by the company and by the financial health of a
company. Using these findings the work shows how illiquidity discount could be used in
evaluation of private companies.

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ČSOB
Deloitte
McKinsey & Company

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