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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Volume (Year): 35 (2012)
Issue (Month): ()
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- Bervas, A., 2006. "Market liquidity and its incorporation into risk management," Financial Stability Review, Banque de France, issue 8, pages 63-79, May.
- 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-.
- 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.
- Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183 World Scientific Publishing Co. Pte. Ltd..