Efficient Portfolio Valuation Incorporating Liquidity Risk

Quantitative Finance, Oct, 2013

19 Pages Posted: 27 Jan 2011 Last revised: 28 Jan 2014

See all articles by Yu Tian

Yu Tian

Monash University

Ron Rood

Barclays

Cornelis W. Oosterlee

Center for Mathematics and Computer Science (CWI)

Date Written: February 14, 2013

Abstract

According to the theory proposed by Acerbi & Scandolo (2008), the value of a portfolio is defined in terms of public market data and idiosyncratic portfolio constraints imposed by an investor holding the portfolio. Depending on the constraints, one and the same portfolio could have different values for different investors. As it turns out, within the Acerbi-Scandolo theory, portfolio valuation can be framed as a convex optimization problem. We provide useful MSDC models and show that portfolio valuation can be solved with remarkable accuracy and efficiency.

Keywords: Liquidity Risk, Portfolio Valuation, Ladder MSDC, Liquidation Sequence, Exponential MSDC, Approximation

JEL Classification: G60, G11, G12

Suggested Citation

Tian, Yu and Rood, Ron and Oosterlee, Cornelis W., Efficient Portfolio Valuation Incorporating Liquidity Risk (February 14, 2013). Quantitative Finance, Oct, 2013, Available at SSRN: https://ssrn.com/abstract=1749766 or http://dx.doi.org/10.2139/ssrn.1749766

Yu Tian (Contact Author)

Monash University ( email )

Melbourne, Victoria VIC 3800
Australia

Ron Rood

Barclays ( email )

London EC3P 3AH
United Kingdom

Cornelis W. Oosterlee

Center for Mathematics and Computer Science (CWI) ( email )

P.O. Box 94079
Amsterdam, NL-1090 GB
Netherlands

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