Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components

Doojin Ryu, Robert I. Webb and Jinyoung Yu

The European Journal of Finance, 2022, vol. 28, issue 9, 871-888

Abstract: This study constructs an extended value-at-risk model that incorporates all microstructural liquidity components using a high-quality tick-by-tick index options market dataset. Out-of-sample backtesting and mean-difference analyses suggest that the traditional value-at-risk measure significantly underestimates investors’ potential losses relative to our new liquidity-adjusted measure. Logistic regressions reveal that ex-ante market illiquidity increases violations of liquidity-adjusted value-at-risk and that these violations are often driven by foreign institutional investors.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:28:y:2022:i:9:p:871-888

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DOI: 10.1080/1351847X.2021.1946414

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