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Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components

Author

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  • Doojin Ryu
  • Robert I. Webb
  • Jinyoung Yu

Abstract

This study constructs an extended value-at-risk model that incorporates all microstructural liquidity components using a high-quality tick-by-tick index options market dataset. Out-of-sample backtesting and mean-difference analyses suggest that the traditional value-at-risk measure significantly underestimates investors’ potential losses relative to our new liquidity-adjusted measure. Logistic regressions reveal that ex-ante market illiquidity increases violations of liquidity-adjusted value-at-risk and that these violations are often driven by foreign institutional investors.

Suggested Citation

  • Doojin Ryu & Robert I. Webb & Jinyoung Yu, 2022. "Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components," The European Journal of Finance, Taylor & Francis Journals, vol. 28(9), pages 871-888, June.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:9:p:871-888
    DOI: 10.1080/1351847X.2021.1946414
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    File URL: http://hdl.handle.net/10.1080/1351847X.2021.1946414
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    Cited by:

    1. Ham, Hyuna & Ryu, Doojin & Webb, Robert I., 2022. "The effects of overnight events on daytime trading sessions," International Review of Financial Analysis, Elsevier, vol. 83(C).

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