The Value of Liquidity and Trading Activity in Forecasting Downside Risk

Lidia Sanchis-Marco and Antonio Rubia

Chapter 8 in Financial Econometrics Modeling: Market Microstructure, Factor Models and Financial Risk Measures, 2011, pp 194-212 from Palgrave Macmillan

Abstract: Abstract In this paper, we analyze the role played by market liquidity and tradingrelated variables in forecasting one-day-ahead “value-at-risk” (VaR). We use the quantile-regression methodology, as this allows us to directly study the effects of the predictive variables on the tail distribution of returns. Our empirical setting builds on the so-called CAViaR model put forward by Engle and Manganelli (2004) and extends it empirically by incorporating further information beyond volatility. The backtesting VaR analysis, based on unconditional and conditional coverage tests, reveals that liquidity and trading variables considerably enhance the VaR performance.

Keywords: Quantile Regression; Trading Activity; Exponential Weighting Move Average; Downside Risk; Market Liquidity (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-29810-1_8

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DOI: 10.1057/9780230298101_8

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