Thinly Traded Securities and Risk Management

50 Pages Posted: 7 Nov 2013 Last revised: 10 Nov 2013

See all articles by Alejandro Bernales

Alejandro Bernales

Universidad de Chile

Diether W. Beuermann

University of Maryland - College Park; Durham Business School; Inter-American Development Bank (IADB); Universidad de Lima - Facultad de Economia

Gonzalo Cortazar

Pontificia Universidad Catolica de Chile

Date Written: November 7, 2013

Abstract

Thinly traded securities exist in both emerging and well developed markets. However, plausible estimations of market risk measures for portfolios with infrequently traded securities have not been explored in the literature. We propose a methodology to calculate market risk measures based on the Kalman filter which can be used on incomplete datasets. We implement our approach in a fixed-income portfolio within a thin trading environment. However, a similar approach may be also applied to other markets with thinly traded securities. Our methodology provides reliable market risk measures in portfolios with infrequent trading.

Keywords: Incomplete Panels, Kalman Filter, Market Risk, Risk Management, Thin Trading, Value-at-Risk

JEL Classification: G11; G12; G32

Suggested Citation

Bernales, Alejandro and Beuermann, Diether Wolfgang and Cortazar, Gonzalo, Thinly Traded Securities and Risk Management (November 7, 2013). Available at SSRN: https://ssrn.com/abstract=2351188 or http://dx.doi.org/10.2139/ssrn.2351188

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Diether Wolfgang Beuermann

University of Maryland - College Park ( email )

College Park, MD 20742
United States
240-838-9376 (Phone)

HOME PAGE: http://www.econ.umd.edu/~beuermann

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

HOME PAGE: http://www.dur.ac.uk/dbs

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States
202-623-2172 (Phone)

HOME PAGE: http://www.iadb.org

Universidad de Lima - Facultad de Economia ( email )

Av. Javier Prado Este s/n
Lima, Lima 33
Peru

HOME PAGE: http://www.ulima.edu.pe

Gonzalo Cortazar

Pontificia Universidad Catolica de Chile ( email )

Departamento Ingenieria Industrial y de Sistemas
Av. Vicuna Mackenna 4860
Santiago
Chile

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