MARKET LIQUIDITY AND STRATEGIC ASSET ALLOCATION: APPLICATIONS TO GCC STOCK EXCHANGES
Mazin A. M. Al Janabi ()
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Mazin A. M. Al Janabi: Department of Economics and Finance, College of Business and Economics, United Arab Emirates University, P. O. Box 17555, Al-Ain, United Arab Emirates
Middle East Development Journal (MEDJ), 2009, vol. 01, issue 02, 227-254
This paper aims at investigating issues of asset allocation and equity trading risk in the Gulf Cooperation Council (GCC) stock markets. The intent of this work is to bridge the gap in current asset market liquidity risk management methodologies and to assist GCC financial institutions in developing proactive asset market liquidity risk management techniques to assess potential market risks in light of the upshots of the current financial crisis. Using daily data of main market indicators for the period 2004–2009 and the Liquidity-Adjusted Value at Risk (L-VaR) model, the author finds that the distribution of the equity returns in the GCC stock markets is far from being normal and thus justifies using the L-VaR model, combined with other methods such as stress-testing, to incorporate the other remaining risks. Furthermore, the author shows that although there is a clear departure from normality, the asset market liquidity risk can be estimated without the need of complex mathematical and analytical procedures. To this end, several financial modeling strategies are achieved with the objective of creating a realistic framework of equity trading risk measurement in addition to the instigation of a practical iterative optimization technique for the calculation of maximum authorized L-VaR limits, subject to meaningful real-word operational constraints. Our modeling technique and empirical analysis have important implications for the GCC financial markets and can aid local financial institutions in developing advanced internal risk models and in complying with the requirements of the Basel II committee on capital adequacy.
Keywords: Basel II; emerging markets; financial engineering; financial risk management; GCC financial markets; portfolio management; risk budgeting; liquidity-adjusted value at risk (search for similar items in EconPapers)
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