Liquidity-adjusted Market Risk Measures with Stochastic Holding Period

Damiano Brigo and Claudio Nordio

Papers from arXiv.org

Abstract: Within the context of risk integration, we introduce in risk measurement stochastic holding period (SHP) models. This is done in order to obtain a `liquidity-adjusted risk measure' characterized by the absence of a fixed time horizon. The underlying assumption is that - due to changes on market liquidity conditions - one operates along an `operational time' to which the P&L process of liquidating a market portfolio is referred. This framework leads to a mixture of distributions for the portfolio returns, potentially allowing for skewness, heavy tails and extreme scenarios. We analyze the impact of possible distributional choices for the SHP. In a multivariate setting, we hint at the possible introduction of dependent SHP processes, which potentially lead to non linear dependence among the P&L processes and therefore to tail dependence across assets in the portfolio, although this may require drastic choices on the SHP distributions. We also find that increasing dependence as measured by Kendall's tau through common SHP's appears to be unfeasible. We finally discuss potential developments following future availability of market data.

Date: 2010-09, Revised 2010-10
New Economics Papers: this item is included in nep-ban
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1009.3760 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1009.3760

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().