The Valuation of Options in Illiquid Markets : A Comparison of Methods

We study methods that can potentially be used for estimating the value of European options on individual stocks in markets in where such products are not actively traded. The study is motivated by the frequent need for market participants to provide quotes for such options in extremely illiquid markets. Examples are the equity markets in Japan and Hong Kong where practically all single stock options are very illiquid as well as the US market where financial institutions have recently been selling long dated collars on stocks that do not have an active options market