Market Risk Prediction under Illiquid Market Environments: A Comparison of Alternative Modeling Techniques

Abstract

This paper bridges the gap in trading risk management literatures, and particularly from the perspective of emerging and illiquid markets. We find that under certain trading strategies, such as short-selling of stocks, the sensitivity of L-VaR statistics are rather critical to the selected internal asset liquidity model in addition to the degree of correlation factors among trading assets.

Keywords: Economic Capital, Emerging Markets, Financial Engineering, Financial Risk Management, GARCH-M, Portfolio Management, Stress Testing, Liquidity-Adjusted Value at Risk

JEL Classification: C10, C13, G20, and G28