Intrinsic Liquidity in Conditional Volatility Models

Serge Darolles, Christian Francq, Gaelle Le Fol and Jean-Michel Zakoian

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Abstract: Until recently the liquidity of financial assets has typically beenviewed as a second-order consideration. Liquidity was frequently associatedwith simple transaction costs that impose - temporary if any- effect on assetprices, and whose shocks could be easily diversified away. Yet the evidenceespeciallythe recent liquidity crisis- suggests that liquidity is now a primaryconcern. This paper aims at disentangling market risk and liquidity riskin the context of conditional volatility models. Our approach allows theisolation of the intrisic liquidity of any asset, and thus makes it possible todeduce a liquidity risk even when volumes are not observed.

Keywords: C01; C58; C22; G11; Value-at-Risk; Risk measures; Quasi-Maximum Likelihood; Liquidity; Garch (search for similar items in EconPapers)
Date: 2016
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Published in Annals of Economics and Statistics, 2016, 123/124, ⟨10.15609/annaeconstat2009.123-124.0225⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01500747

DOI: 10.15609/annaeconstat2009.123-124.0225

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