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Measuring Market Liquidity Risk - Which Model Works Best?
Cornelia Ernst Technical University of Munich - Chair of Business and International Financial Management Sebastian Stange Technical University of Munich - Chair of Business and International Financial Management; Boston Consulting Group - Germany Christoph Kaserer Technische Universität München January 15, 2009 CEFS Working Paper Series 2009 No. 1 Abstract: Market liquidity risk, the difficulty or cost of trading assets in crises, has been recognized as an important factor in risk management. 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 never been benchmarked. This paper performs comparative back-tests of daily risk forecasts for a large selection of traceable liquidity risk models. In a 5.5 year stock sample we show which model provides most accurate results and provide detailed recommendations which model is most suitable in a specific situation.
Keywords: Asset liquidity, liquidity cost, price impact, Xetra liquidity measure (XLM), risk measurement, Value-at-Risk, market liquidity risk JEL Classifications: G11, G12, G18, G32 Working Paper SeriesDate posted: January 16, 2009 ; Last revised: April 20, 2009Suggested CitationContact Information
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