Risk Capital Allocation under Market Liquidity Constraints
6 Pages Posted: 18 May 2021
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: Suggested Citation