Incorporating Asset Liquidity Effects in Risk-Capital Modeling

Al Janabi Mazin A. M.
Additional contact information
Al Janabi Mazin A. M.: United Arab Emirates University

Review of Middle East Economics and Finance, 2010, vol. 6, issue 1, 60-89

Abstract: Recent turmoil in financial markets endorses the need for rigorous handling and integration of asset liquidity risk into Value-at-Risk (VaR) models. In this work we develop and test measures of certain kinds of asset liquidity risk that is useful for completing the definition of market risk and for predicting liquidity-adjusted VaR under adverse market conditions. This paper presents a practical simulation framework for the modeling of asset liquidity risk for portfolios that consist of multiple long and short trading assets. We put forward a method whereby the holding periods are adjusted according to the specific needs of each trading portfolio by explicitly modeling a linearly-distributed liquidation scheme by means of a pertinent scaling multiplier. The empirical testing is achieved using daily return data of emerging Gulf-Cooperation-Council (GCC) stock markets. We simulate and analyze different relevant portfolios (of both long and short-sales trading positions) and determine the risk-capital exposure under varied illiquid and adverse market conditions.

Keywords: asset liquidity risk; economic-capital; emerging markets; financial engineering; financial risk management; GARCH-M (1; 1) model; GCC financial markets; liquidity adjusted value-at-risk; portfolio management; risk-capital; trading risk (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.2202/1475-3693.1258 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:rmeecf:v:6:y:2010:i:1:n:3

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/rmeef/html

DOI: 10.2202/1475-3693.1258

Access Statistics for this article

Review of Middle East Economics and Finance is currently edited by Ghassan Dibeh

More articles in Review of Middle East Economics and Finance from De Gruyter
Bibliographic data for series maintained by Peter Golla ().