Measuring Market Liquidity Risk - Which Model Works Best?
CEFS Working Paper Series 2009 No. 1
28 Pages Posted: 16 Jan 2009 Last revised: 22 Jun 2016
Date Written: January 15, 2009
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 Classification: G11, G12, G18, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Liquidity Risk Integration in Portfolio Choice: The Bid Efficient Frontier
-
Heavy-Tailed Features and Dependence in Limit Order Book Volume Profiles in Futures Markets
By Kylie-anne Richards, Gareth Peters, ...
-
Joint Distribution of Maxima and Minima of Multivariate Random Variates
-
Market Liquidity Risk and Market Risk Management
By Yu Tian