Research toward the Practical Application of Liquidity Risk Evaluation Methods
This paper proposes a practical framework for the quantification of Liquidity-adjusted Value at Risk ("L-VaR") incorporating the market liquidity of financial products. This framework incorporates the mechanism of the market impact caused by the investor's own dealings through adjusting Value-at-Risk according to the level of market liquidity and the scale of the investor's position. Specifically, the optimal execution strategy for liquidating the investor's entire position is first calculated taking the market impact into account. Then the maximum loss that may be incurred by price fluctuations under optimal execution strategy is calculated as L-VaR. This paper presents a specific model providing a closed-form solution for calculating L-VaR, and examines whether this framework can be applied to the practices of financial risk management by calculating numerical examples. It also demonstrates that this L-VaR calculation framework may be applied under more general conditions, such as (1) when the market impact is uncertain, (2) when the investor's portfolio consists of multiple financial assets, and (3) when there is a non-linear relationship between the market impact and the trading volume.
Volume (Year): 18 (2000)
Issue (Month): 2 (December)
|Contact details of provider:|| Postal: |
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Anil Bangia & Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Modeling Liquidity Risk With Implications for Traditional Market Risk Measurement and Management," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-062, New York University, Leonard N. Stern School of Business-.
- Holthausen, Robert W. & Leftwich, Richard W. & Mayers, David, 1987. "The effect of large block transactions on security prices: A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 19(2), pages 237-267, December.
- Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:18:y:2000:i:2:p:83-127. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.