Integration des Marktliquiditätsrisikos in das Risikoanalysekonzept des Value at Risk
Abstract-- Most traditional Value at Risk models neglect market liquidity risk and hence only consider the market price risk (i.e. risk associated with holding a certain position). In order to fully capture the market risk associated to holding and trading a position, we first define market liquidity risk, its dimensions (tightness, depth, resiliency, immediacy) and causes (exogenous / endogenous). We then present and evaluate different liquidity-adjusted Value at Risk models which capture one or more dimensions of market liquidity risk and thereby present a more true view on the overall market risk. This paper also spotlights how Basel III regulation defines liquid assets, derived from the Liquidity Coverage Ratio (LCR) framework, and evaluates if this regulation adequately reflects market liquidity risk. We conclude that the LCR concept is flawed as the defined buckets of liquid assets do not reflect the true liquidity of certain assets. Furthermore it can be said that the defined buckets might result in heightened systematic risk as banks will focus on certain asset classes. Additionally the corporate fixed income sector might experience a crowding out as these assets will appear less rewarding to banks.
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Bibliographic InfoPaper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 198.
Date of creation: 2012
Date of revision:
Market Risk; Market Liquidity Risk; Market Microstructure; Liquidity-adjusted Value-at-Risk; Basel III; Liquidity Coverage Ratio; Liquid Assets;
Find related papers by JEL classification:
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- D4 - Microeconomics - - Market Structure and Pricing
- G1 - Financial Economics - - General Financial Markets
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-BAN-2012-12-06 (Banking)
- NEP-MST-2012-12-06 (Market Microstructure)
- NEP-ORE-2012-12-06 (Operations Research)
- NEP-RMG-2012-12-06 (Risk Management)
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