Risk Capital Allocation under Market Liquidity Constraints

6 Pages Posted: 18 May 2021

See all articles by Mazin A. M. Al Janabi

Mazin A. M. Al Janabi

EGADE Business School, Tecnologico de Monterrey; EGADE Business School, Tecnologico de Monterrey; Economic Research Forum (ERF)

Date Written: May 16, 2021

Abstract

We develop measures of certain kinds of liquidity trading risk that is useful for completing the definition of market risk and for predicting liquidity-adjusted VaR (L-VaR) under illiquid market conditions. We argue that asset liquidity risk associated with the uncertainty of liquidating multiple-asset portfolios over a given holding period is a key factor in the computation of a credible risk-capital allocations in financial trading units.

Keywords: Emerging Markets, Financial Engineering, Financial Risk Management, GARCH-M Model, Liquidity Risk, Optimization, Portfolio Management, Sub-prime Crisis, Value-at-Risk

JEL Classification: C10, C13, G20, and G28

Suggested Citation

Al Janabi, Mazin A. M., Risk Capital Allocation under Market Liquidity Constraints (May 16, 2021). Available at SSRN: https://ssrn.com/abstract=3847073 or http://dx.doi.org/10.2139/ssrn.3847073

Mazin A. M. Al Janabi (Contact Author)

EGADE Business School, Tecnologico de Monterrey ( email )

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Mexico City, 01389
Mexico

EGADE Business School, Tecnologico de Monterrey ( email )

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Col. Tecnológico
Monterrey, Nuevo León 64849
Mexico

Economic Research Forum (ERF) ( email )

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(P.O. Box: 12311)
Dokki, Cairo
Egypt

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