A Note on the Discount for Lack of Marketability

Abstract

In this paper we first demonstrate that the Discount for Lack of Marketability (DLOM) derived from option-based models can be replicated using an at-the-money (ATM) put option approximation. We examine three well-known models used in the industry and show that their DLOM estimates are proportional to asset volatility, offering a consistent framework for comparison. Second, we extend the framework to consider time-variant variance by means of GARCH models. We report that a zero-order approximation of the model provides accurate estimates of DLOM for a given set of parameters. This suggests the use of the average between long-run and current variances.