The Liquidity Discount
Georgia State University
Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management
Mathematical Finance, Vol. 11, No. 4, pp. 447-474, October 2001
This paper characterizes the liquidity discount, the difference between the market value of a large trader's position and its value when liquidated. This discount occurs whenever traders face downward sloping demand curves for shares and execution lags in selling shares. This characterization enables one to modify the standard value at risk (VAR) computation to include liquidity risk.
Number of Pages in PDF File: 28
Keywords: Liquidity Risk, Large Trader, Value at Risk
JEL Classification: C61, D40, D81Accepted Paper Series
Date posted: February 16, 2004 ; Last revised: March 31, 2009
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