Market and Liquidity Risks Using Transaction-by-Transaction Information

Mariano González-Sánchez, Eva M. Ibáñez Jiménez and Ana Isabel Segovia San Juan
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Mariano González-Sánchez: Department of Business and Accounting, UNED (Universidad Nacional de Educación a Distancia), Paseo Senda del Rey, 11 Madrid, Spain
Eva M. Ibáñez Jiménez: Department of Business and Accounting, UNED (Universidad Nacional de Educación a Distancia), Paseo Senda del Rey, 11 Madrid, Spain
Authors registered in the RePEc Author Service: Mariano Gonzalez Sanchez

Mathematics, 2021, vol. 9, issue 14, 1-14

Abstract: The usual measures of market risk are based on the axiom of positive homogeneity while neglecting an important element of market information—liquidity. To analyze the effects of this omission, in the present study, we define the behavior of prices and volume via stochastic processes subordinated to the time elapsing between two consecutive transactions in the market. Using simulated data and market data from companies of different sizes and capitalization levels, we compare the results of measuring risk using prices compared to using both prices and volumes. The results indicate that traditional measures of market risk behave inversely to the degree of liquidity of the asset, thereby underestimating the risk of liquid assets and overestimating the risk of less liquid assets.

Keywords: liquidity risk; volume; trade; intraday frequency (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
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