Measuring market liquidity risk - which model works best?

Cornelia Ernst, Sebastian Stange and Christoph Kaserer

Journal of Financial Transformation, 2012, vol. 35, 133-146

Abstract: Market liquidity risk, the difficulty or cost of trading assets in crises, has been recognized as an important factor in risk management. The literature has already proposed several models to include liquidity risk in the standard Value-at-Risk framework. While theoretical comparisons between those models have been conducted, their empirical performance has yet to be benchmarked. This paper performs comparative back-testings of daily risk forecasts for a large selection of liquidity risk models. In a comprehensive 5.5-year stock sample we show which model provides the most accurate results and provide detailed recommendations about which model is most suitable in a specific situation.

Keywords: market liquidity; market liquidity risk; risk management; liquidity risk; Value-at-Risk; liquidity risk model (search for similar items in EconPapers)
JEL-codes: G24 G32 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1534

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