A LIQUIDATION RISK ADJUSTMENT FOR VALUE AT RISK AND EXPECTED SHORTFALL
| Autor: | Lakshithe Wagalath, Jorge P. Zubelli |
|---|---|
| Přispěvatelé: | Lille économie management - UMR 9221 (LEM), Université d'Artois (UA)-Université catholique de Lille (UCL)-Université de Lille-Centre National de la Recherche Scientifique (CNRS), Instituto Nacional de Matemática Pura e Aplicada (IMPA), Instituto Nacional de matematica pura e aplicada |
| Jazyk: | angličtina |
| Rok vydání: | 2018 |
| Předmět: |
Financial institution
risk management value at risk [SHS]Humanities and Social Sciences Margin (finance) 0502 economics and business Economics 050207 economics Risk management 050208 finance Actuarial science fire sales business.industry Risk measure 05 social sciences Market liquidity Liquidation risk Expected shortfall expected shortfall Portfolio [SHS.GESTION]Humanities and Social Sciences/Business administration business General Economics Econometrics and Finance Finance Value at risk price impact |
| Zdroj: | International Journal of Theoretical and Applied Finance International Journal of Theoretical and Applied Finance, World Scientific Publishing, 2018, 21 (03), pp.1850010. ⟨10.1142/S0219024918500103⟩ International Journal of Theoretical and Applied Finance, 2018, 21 (03), pp.1850010. ⟨10.1142/S0219024918500103⟩ |
| ISSN: | 0219-0249 |
| DOI: | 10.1142/S0219024918500103⟩ |
| Popis: | International audience; This paper proposes an intuitive and flexible framework to quantify liquidation risk for financial institutions. We develop a model where the “fundamental” dynamics of assets is modified by price impacts from fund liquidations. We characterize mathematically the liquidation schedule of financial institutions and study in detail the fire sales resulting endogenously from margin constraints when a financial institution trades through an exchange. Our study enables to obtain tractable formulas for the value at risk and expected shortfall of a financial institution in the presence of fund liquidation. In particular, we find an additive decomposition for liquidation-adjusted risk measures. We show that such a measure can be expressed as a “fundamental” risk measure plus a liquidation risk adjustment that is proportional to the size of fund positions as a fraction of asset market depths. Our results can be used by risk managers in financial institutions to tackle liquidity events arising from fund liquidations better and adjust their portfolio allocations to liquidation risk more accurately. |
| Databáze: | OpenAIRE |
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