How large is liquidity risk in an automated auction market?

Pierre Giot () and Joachim Grammig ()
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Pierre Giot: University of Namur
Joachim Grammig: University of Tübingen

A chapter in High Frequency Financial Econometrics, 2008, pp 111-131 from Springer

Abstract: We introduce a new empirical methodology that models liquidity risk over short time periods for impatient traders who submit market orders. Using Value-at-Risk type measures, we quantify the liquidity risk premia for portfolios and individual stocks traded on the automated auction market Xetra. The specificity of our approach relies on the adequate econometric modelling of the potential price impact incurred by the liquidation of a portfolio. We study the sensitivity of liquidity risk towards portfolio size and traders' time horizon, and interpret its diurnal variation in the light of market microstructure theory.

Keywords: Limit Order; Price Impact; Order Book; Liquidity Risk; Portfolio Size (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/978-3-7908-1992-2_6

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