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Intrinsic Liquidity in Conditional Volatility Models

Author

Listed:
  • Serge Darolles
  • Gaëlle Le Fol
  • Christian Francq
  • Jean-Michel Zakoïan

Abstract

Until recently the liquidity of financial assets has typically been viewed as a second-order consideration. Liquidity was frequently associated with simple transaction costs that impose ? temporary if any ? effect on asset prices, and whose shocks could be easily diversified away. Yet the evidence ? especially the recent liquidity crisis ? suggests that liquidity is now a primary concern. This paper aims at disentangling market risk and liquidity risk in the context of conditional volatility models. Our approach allows the isolation of the intrisic liquidity of any asset, and thus makes it possible to deduce a liquidity risk even when volumes are not observed.

Suggested Citation

  • Serge Darolles & Gaëlle Le Fol & Christian Francq & Jean-Michel Zakoïan, 2016. "Intrinsic Liquidity in Conditional Volatility Models," Annals of Economics and Statistics, GENES, issue 123-124, pages 225-245.
  • Handle: RePEc:adr:anecst:y:2016:i:123-124:p:225-245
    DOI: 10.15609/annaeconstat2009.123-124.0225
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    Keywords

    GARCH; Liquidity; Quasi-Maximum Likelihood; Risk measures; Value-at-Risk;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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