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Measuring market liquidity risk - which model works best?

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  • Ernst, Cornelia
  • Stange, Sebastian
  • Kaserer, Christoph

    ()
    (Technische Universitat Munchen)

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    Abstract

    Market liquidity risk, the difficulty or cost of trading assets in crises, has been recognized as an important factor in risk management. The literature has already proposed several models to include liquidity risk in the standard Value-at-Risk framework. While theoretical comparisons between those models have been conducted, their empirical performance has yet to be benchmarked. This paper performs comparative back-testings of daily risk forecasts for a large selection of liquidity risk models. In a comprehensive 5.5-year stock sample we show which model provides the most accurate results and provide detailed recommendations about which model is most suitable in a specific situation.

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    Bibliographic Info

    Article provided by Capco Institute in its journal Journal of Financial Transformation.

    Volume (Year): 35 (2012)
    Issue (Month): ()
    Pages: 133-146

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    Handle: RePEc:ris:jofitr:1534

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    Related research

    Keywords: market liquidity; market liquidity risk; risk management; liquidity risk; Value-at-Risk; liquidity risk model;

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