Risk Management for Whales

7 Pages Posted: 29 Feb 2016 Last revised: 19 May 2016

See all articles by Rama Cont

Rama Cont

University of Oxford; CNRS

Lakshithe Wagalath

IESEG School of Management

Date Written: 2015

Abstract

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

Cont, Rama and Wagalath, Lakshithe, Risk Management for Whales (2015). Available at SSRN: https://ssrn.com/abstract=2739227 or http://dx.doi.org/10.2139/ssrn.2739227

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

CNRS ( email )

LPSM
Sorbonne University
Paris
France

HOME PAGE: http://rama.cont.perso.math.cnrs.fr/

Lakshithe Wagalath

IESEG School of Management ( email )

1 Parvis de la Défense
Paris, 92044
France

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