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Practical Applications

Practical Applications

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Practical Applications of The Valuation of Illiquid Assets: A Focus on Private Equity and Real Estate

Rajna Gibson Brandon, Martin Hoesli and Jiajun Shan
Practical Applications DOI: https://doi.org/10.3905/pa.2022.jaipa060
Rajna Gibson Brandon
is a professor in the Geneva Finance Research Institute at the University of Geneva in Geneva, Switzerland
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Martin Hoesli
is a professor in the Geneva Finance Research Institute at the University of Geneva in Geneva, Switzerland and at the University of Aberdeen Business School at King’s College in Aberdeen, UK
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Jiajun Shan
is a PhD candidate in the Department of Statistics at the Geneva School of Economics and Management, University of Geneva in Geneva, Switzerland
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Abstract

In The Valuation of Illiquid Assets: A Focus on Private Equity and Real Estate in the Summer 2022 issue of the The Journal of Alternative Investments, Rajna Gibson Brandon, Martin Hoesli, and Jiajun Shan, all at the University of Geneva, demonstrate the benefits of an option-based approach to valuing illiquid assets. One of their main contributions to the existing literature is modeling the change in the value of the underlying venture capital fund as a mixed jump-diffusion process. Their results illustrate how following a naive net-present-value (NPV) rule leads to suboptimal investment timing by ignoring the option to wait. The option to wait to make subsequent investments and evaluate new information is valuable. Furthermore, the value of the option can be used to determine the appropriateness of VC fund fees, as it represents the right to invest in the underlying portfolio companies or properties.

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Practical Applications
Vol. 9, Issue 2
31 Oct 2021
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Practical Applications of The Valuation of Illiquid Assets: A Focus on Private Equity and Real Estate
Rajna Gibson Brandon, Martin Hoesli, Jiajun Shan
Practical Applications Jul 2022, DOI: 10.3905/pa.2022.jaipa060

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Practical Applications of The Valuation of Illiquid Assets: A Focus on Private Equity and Real Estate
Rajna Gibson Brandon, Martin Hoesli, Jiajun Shan
Practical Applications Jul 2022, DOI: 10.3905/pa.2022.jaipa060
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  • Article
    • Abstract
    • Overview
    • Practical Applications
    • Key Definitions
    • Discussion
    • THE UNDERLYING ASSET VALUE PATH OF THE COMPOUND CALL OPTION MODEL
    • THE COMPOUND OPTION MODEL AND ILLUSTRATIVE ASSUMPTIONS
    • NPV RULE AND OPTION MODEL EXERCISE BOUNDARY
    • NEGATIVE JUMP INTENSITY
    • THE CONVENIENCE YIELD
    • THE VALUE OF THE OPTION AS A FEE
    • PRACTICAL CONSIDERATIONS
    • References
    • Rajna Gibson Brandon
    • Martin Hoesli
    • Jiajun Shan
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