On the Assessment of Coherent Risk-Capital Structures

Abstract

We argue that asset liquidity risk associated with the uncertainty of liquidating multiple-assets over a given holding period, particularly for thinly traded or emerging markets securities under adverse market conditions, is a key factor in formalizing and measuring overall trading risk and is therefore an important component to model. This paper proposes a practical framework for the quantification of asset liquidity risk, and its impact on economic capital allocations, for multiple assets’ portfolios.

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

JEL Classification: C10, C13, G20, and G28