Intrinsic Liquidity in Conditional Volatility Models

Serge Darolles, Gaelle Le Fol, Christian Francq and Jean-Michel Zakoian

Annals of Economics and Statistics, 2016, issue 123-124, 225-245

Abstract: Until recently the liquidity of financial assets has typically been viewed as a second-order consideration. Liquidity was frequently associated with simple transaction costs that impose ? temporary if any ? effect on asset prices, and whose shocks could be easily diversified away. Yet the evidence ? especially the recent liquidity crisis ? suggests that liquidity is now a primary concern. This paper aims at disentangling market risk and liquidity risk in the context of conditional volatility models. Our approach allows the isolation of the intrisic liquidity of any asset, and thus makes it possible to deduce a liquidity risk even when volumes are not observed.

Keywords: GARCH; Liquidity; Quasi-Maximum Likelihood; Risk measures; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C01 C22 C58 G11 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Intrinsic Liquidity in Conditional Volatility Models (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2016:i:123-124:p:225-245

DOI: 10.15609/annaeconstat2009.123-124.0225

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