Liquidity-Adjusted Intraday Value at Risk Modeling and Risk Management: An Application to Data from Deutsche Börse

51 Pages Posted: 21 Feb 2014 Last revised: 1 Mar 2014

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Maria Pacurar

Dalhousie University - Rowe School of Business

Xiaozhou Zhou

University of Quebec at Montreal (UQAM) - School of Management (ESG)

Date Written: February 28, 2014

Abstract

This paper develops a high-frequency risk measure, the Liquidity-adjusted Intraday Value at Risk (LIVaR). Our objective is to explicitly consider the endogenous liquidity dimension associated with order size. Taking liquidity into consideration when using intraday data is important because significant position changes over very short horizons may have large impacts on stock returns. By reconstructing the open Limit Order Book (LOB) of Deutsche Börse, the changes of tick-by-tick ex-ante frictionless return and actual return are modeled jointly using a Log-ACD-VARMA-MGARCH structure. This modeling helps to identify the dynamics of frictionless and actual returns, and to quantify the risk related to the liquidity premium. From a practical perspective, our model can be used not only to identify the impact of ex-ante liquidity risk on total risk, but also to provide an estimation of VaR for the actual return at a point in time. In particular, there will be considerable time saved in constructing the risk measure for the waiting cost because once the models have been identified and estimated, the risk measure over any time horizon can be obtained by simulation without re-sampling the data and re-estimating the model.

Keywords: Liquidity-adjusted Intraday Value at Risk, Tick-by-tick data, Log-ACD-VARMA-MGARCH, Ex-ante Liquidity premium, Limit Order Book

JEL Classification: C22, C41, C53, G11

Suggested Citation

Dionne, Georges and Pacurar, Maria and Zhou, Xiaozhou, Liquidity-Adjusted Intraday Value at Risk Modeling and Risk Management: An Application to Data from Deutsche Börse (February 28, 2014). Available at SSRN: https://ssrn.com/abstract=2398620 or http://dx.doi.org/10.2139/ssrn.2398620

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

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Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Maria Pacurar

Dalhousie University - Rowe School of Business ( email )

6100 University Avenue
Halifax, Nova Scotia B3H 4R2
Canada

Xiaozhou Zhou

University of Quebec at Montreal (UQAM) - School of Management (ESG) ( email )

315, rue Sainte-Catherine Est
Montreal, Quebec H2X 3X2
Canada
514 987 3000 ext 0999 (Phone)

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