The Pricing Of Illiquid Assets And The Reform Of Equity Segmentation

Liquidity has a significant influence on assets return. Previous researches mainly discussed the influence of liquidity on portfolio selection and asset pricing in terms of market microstructure theory, such as the bid-ask spread and transaction costs. They seldom researched on assets pricing under the condition of liquidity restriction in a certain period. There are many assets (such as China's national share and restrictedinstitutional shares (RIS), staff shares, managerial ownership) which can't be reasonably priced due to the defects of theory. Thus, these researches can't provide theoretical support for the standards of Considerration level in the reform of equity segmentation.This paper provides the optimal portfolio strategies with and without the liquidity restriction under the framework of continuous-time intertemporal dynamic programming. We researches the impact of limitation of liquidity on asset pricing , that is, illiquid discount, and researches the impact factors of the liquidity discount and its time-varied characters ,in order to offer theorical evidence for the standard of Considerration level in the reform of equity segmentation. Then we empirically discuss the reasonability of Considerration level from nonnegotiable shares holders to negotiable shares holders, which exists in the reform of equity segmentation.This paper assistivly contributes to literature on the effects of illiquidity on asset prices. We prove that illiquid assets radically affect the optimal portfolio strategy in asset allocation and assets' price , and we provide original closed-form solution for the optimal portfolio of agents in the Stochastic Volatility Model with liquidity limitation and the illiquid discount rate when time varies .Our empirical results show that illiquid assets discount rate is significantly influenced by the time length of liquidity restriction, the volatility of illiquid assets and other parameters. Therefore, it doesn't support the the average phenomenons of price discount level of companies which have conducted the reform.The innovations of this paper exist in:(1) This paper researches on the assets pricing in illiquid market under the condition of market segmentation by breaking through the previous researches framework of assets pricing in liquid market. Under the framework of this paper, illiquidity is the characteristic of the whole market instead of a certain security. Thus, we endow the definition of illiquid with more macro colors.(2) We provide original closed-form solution for the optimal portfolio of agents with the existence of illiquid assets and the analytical formula of illiquid discount rate when time varies (There is no analytical formula to the problem both in china and abroad so far).(3) We provide original closed-form solution for Hamilton-Jacobi-Bellman equation of Utility function.(4) We also provide the conversion method (coefficient of containing premium of A share), with which we can link Considerration rate in practical process of equity reform with discount rate acquired by theoretical inference. Thus, we've perfectly combined theory with reality.