The Ingersoll model requires these inputs to estimate the DLOM: 1. Time (T) Definition: This represents the holding period or the time until the asset can be freely sold, usually expressed in years. Significance: Time affects the calculation by determining the duration over which the asset is illiquid. The longer the asset remains illiquid, the higher the potential DLOM, as the holder is restricted from capitalizing on favorable market conditions. Application: Used to simulate the period during which an investor is expected to hold the illiquid asset before it can be sold, affecting the discount level applied in the DLOM calculation. 2. Expected Volatility (σ) Definition: This is the annualized standard deviation of the asset's returns, indicating the asset's price variability. Significance: Volatility is crucial in option-based models as it reflects the risk associated with the price movements of the asset. Higher volatility indicates a greater uncertainty in returns, which can enhance the DLOM due to increased risks during the illiquid period. Application: Typically estimated from historical data of the asset or similar assets. If the asset is not publicly traded, volatility might be inferred from comparable public companies or industry averages. 3. Dividend Yield (q) Definition: The expected annual dividends from the asset, expressed as a percentage of its current price. Significance: Dividend yield impacts the DLOM by providing returns to the holder during the period of illiquidity, potentially offsetting some of the disadvantages of not being able to sell the asset. Application: For assets that distribute dividends, this input reduces the cost of holding during the illiquid period. For non-dividend-paying assets, this is set to zero. 4. Index Volatility (σ_I) Definition: This is the volatility of the market index or benchmark with which the asset is associated. Significance: Index volatility helps to understand the broader market risks that influence the asset beyond its individual characteristics. Application: Used to assess the market environment's overall volatility, providing context to the asset's volatility. Typically sourced from historical data of the market index. 5. Stock Beta (β) Definition: Beta measures the asset’s sensitivity to market movements relative to a benchmark index. Significance: A higher beta indicates that the asset’s price is more responsive to market changes, affecting the risk profile and thus the DLOM. Application: Calculated based on historical price movements relative to a market index. This factor adjusts the asset's individual volatility in relation to the market. 6. Stock Fraction (F) Definition: The fraction of the asset's total value that the stock represents. Significance: This input can help assess how significant the illiquid stock is in relation to the owner's total portfolio, which can influence their risk tolerance and the perceived DLOM. Application: Determined by comparing the market value of the illiquid asset to the total value of the owner’s assets. 7. Relative Risk Aversion (A) Definition: This measures the investor's degree of risk aversion, indicating how sensitive they are to changes in volatility and uncertainty. Significance: It quantifies how much the investor dislikes risk, which directly impacts their valuation of liquidity and thus the DLOM. Application: A higher value indicates a higher aversion to risk, which may increase the DLOM as the investor places a higher premium on liquidity. These inputs collectively allow the Ingersoll model to simulate various market and personal factors affecting an investor’s perspective on the value of holding an illiquid asset. Accurately setting these parameters is crucial for properly estimating the DLOM in diverse market and individual scenarios.">