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Measuring market liquidity risk - which model works best?

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Author Info

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

Abstract

Market liquidity risk, the difficulty or cost of trading assets in crises, has been recognized as an important factor in risk management. 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 never been benchmarked. This paper performs comparative back-tests of daily risk forecasts for a large selection of traceable liquidity risk models. In a 5.5 year stock sample we show which model provides most accurate results and provide detailed recommendations which model is most suitable in a specific situation. --

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Bibliographic Info

Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2009-01.

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Date of creation: 2009
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Handle: RePEc:zbw:cefswp:200901

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Related research

Keywords: asset liquidity; liquidity cost; price impact; Xetra liquidity measure (XLM); risk measurement; Value-at-Risk; market liquidity risk;

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References

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  1. Anil Bangia & Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Modeling Liquidity Risk, With Implications for Traditional Market Risk Measurement and Management," Center for Financial Institutions Working Papers 99-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
  3. Bervas, A., 2006. "Market liquidity and its incorporation into risk management," Financial Stability Review, Banque de France, issue 8, pages 63-79, May.
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Cited by:
  1. Holmberg, Ulf, 2012. "Essays on Credit Markets and Banking," UmeÃ¥ Economic Studies 840, Umeå University, Department of Economics.

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