# kaal:claim:4033886-024

**Claim.** The Longstaff model's assumptions are inconsistent with reality on two fronts: investors do not have perfect timing, and its assumed volatility of ten to thirty percent is far below the volatility exceeding fifty percent typical of small stocks.

**Type.** failure  **Support.** argued

**Holds when.**

- application of the Longstaff model to small or highly volatile securities

**Source quote.**

> The Longstaff model's underlying assumptions are inconsistent with the reality of perfect timing as well as the assumed volatility level between ten to thirty percent, yet small stocks typically have volatility exceeding fifty percent.113

**From.** Wulf A. Kaal, Samuel Evans, Hayley Howe, *Digital Asset Valuation* (2022), III.3.a(2) Longstaff Model, page 26

**Cite as.** Wulf A. Kaal, Samuel Evans, Hayley Howe, Digital Asset Valuation (2022). SSRN: https://ssrn.com/abstract=4033886

**Verify.** sha256 of source PDF `52ba05b1292b1be4bfaf1ee5cf56b14fea9c196d870603e794d7ee316df129bd` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Kaal%20et%20al.%20-%202022%20-%20Digital%20Asset%20Valuation.pdf

**Failure mode.** volatility assumption mismatch  (family: research-design-limitation)

**Topics.** institutional-design

**Keywords.** longstaff-model, volatility-assumptions, dlom, model-limitations

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