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How large is liquidity risk in an automated auction market?

In: High Frequency Financial Econometrics

Author

Listed:
  • Pierre Giot

    (University of Namur
    Université catholique de Louvain)

  • Joachim Grammig

    (University of Tübingen
    Centre for Financial Research)

Abstract

We introduce a new empirical methodology that models liquidity risk over short time periods for impatient traders who submit market orders. Using Value-at-Risk type measures, we quantify the liquidity risk premia for portfolios and individual stocks traded on the automated auction market Xetra. The specificity of our approach relies on the adequate econometric modelling of the potential price impact incurred by the liquidation of a portfolio. We study the sensitivity of liquidity risk towards portfolio size and traders' time horizon, and interpret its diurnal variation in the light of market microstructure theory.

Suggested Citation

  • Pierre Giot & Joachim Grammig, 2008. "How large is liquidity risk in an automated auction market?," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 111-131, Springer.
    • Handle: RePEc:spr:stecpp:978-3-7908-1992-2_6
    DOI: 10.1007/978-3-7908-1992-2_6
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    Cited by:

    1. Ernst, Cornelia & Stange, Sebastian & Kaserer, Christoph, 2012. "Measuring market liquidity risk - which model works best?," Journal of Financial Transformation, Capco Institute, vol. 35, pages 133-146.

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