Valuation of Illiquid Assets: Third Party Sources

Ian Blance

This article was first published as a chapter in Managing Illiquid Assets: Perspectives and Challenges, by Risk Books.

This chapter focuses on the methods and sources available for the valuation of illiquid financial assets: typically over-the-counter (OTC), “off-exchange” instruments where regular trading might not take place and the process of ongoing valuation is much more difficult and complex. It therefore only briefly covers the range of securities and derivatives for which a valuation can be reliably and directly derived from trading on a recognised exchange.

The business of producing valuations for financial assets effectively falls to four main players: an exchange where the instrument might trade, the institution which holds the asset (internal solution), other financial firms who interact with the holder and may have a level of expert knowledge of the asset (counterparties) and independent vendors of valuations and pricing (third parties).

We review the various methods available to an institution required to value their financial holdings, and give a résumé of the pros and cons of each method. We then review the various parties and firms involved in providing