International capital market integration together with increasing international volatility, requires an accurate evaluation of the potential losses that portfolio managers may face as a result of international turbulence. Assets with high liquidity standards can be evaluated by the traditional Value at Risk approach (VaR), however, this statistic underestimates the true value of the potential losses when the instrument is not liquid. This paper applies the methodology of liquidity adjusted VaR to the Chilean sovereign bond by incorporating bid-ask spread fluctuations when evaluating aportfolio risk.
Johnson, Christian Andrew, Liquidity Adjusted Value at Risk: Application to the Chilean
Sovereign Bond (July 2000). Central Bank of Chile, Working Paper No.76. Available at SSRN: http://ssrn.com/abstract=237648 or http://dx.doi.org/10.2139/ssrn.237648