Risk Management for Whales
7 Pages Posted: 29 Feb 2016 Last revised: 19 May 2016
Date Written: 2015
We propose framework for modeling portfolio risk which integrates market risk with liquidation costs which may arise in stress scenarios. Our model provides a systematic method for computing liquidation-adjusted risk measures for a portfolio. Calculation of Liquidation-adjusted VaR (LVaR) for sample portfolios reveals a substantial impact of liquidation costs on portfolio risk for portfolios with large concentrated positions.
Keywords: liquidity, liquidation, deleveraging, fire sales, London Whale, JP Morgan CIO, market impact, risk management, LVaR, liquidity-adusted Value-at-Risk
JEL Classification: G1, G21, G28
Suggested Citation: Suggested Citation