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Liquidity-adjusted Intraday Value at Risk modeling and risk management: An application to data from Deutsche Börse

Georges Dionne, Maria Pacurar and Xiaozhou Zhou

Journal of Banking & Finance, 2015, vol. 59, issue C, 202-219

Abstract: This paper develops a high-frequency risk measure: the Liquidity-adjusted Intraday Value at Risk (LIVaR). Our objective is to explicitly consider the endogenous liquidity dimension associated with order size. By reconstructing the open Limit Order Book of Deutsche Börse, changes in the tick-by-tick (ex-ante) frictionless return and actual return are modeled jointly. The risk related to the ex-ante liquidity premium is then quantified. Our model can be used to identify the impact of ex-ante liquidity risk on total risk, and to provide an estimation of the VaR for the actual return at a point in time. In our sample, liquidity risk can account for up to 32% of total risk depending on order size.

Keywords: Liquidity-adjusted Intraday Value at Risk; Tick-by-tick data; Log-ACD-VARMA-MGARCH; Ex-ante liquidity premium; Limit Order Book (search for similar items in EconPapers)
JEL-codes: C22 C41 C53 G11 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Liquidity-adjusted Intraday Value at Risk modeling and Risk Management: an Application to Data from Deutsche Börse (2014) Downloads
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