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Measuring market liquidity risk - which model works best?

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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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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  1. Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
  2. 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-.
  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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