A LIQUIDATION RISK ADJUSTMENT FOR VALUE AT RISK AND EXPECTED SHORTFALL

Lakshithe Wagalath () and Jorge Zubelli ()
Additional contact information
Lakshithe Wagalath: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Jorge Zubelli: IMPA - Instituto Nacional de Matemática Pura e Aplicada

Post-Print from HAL

Abstract: This paper proposes an intuitive and flexible framework to quantify liquidation risk for financial institutions. We develop a model where the "fundamental" dynamics of assets is modified by price impacts from fund liquidations. We characterize mathematically the liquidation schedule of financial institutions and study in detail the fire sales resulting endogenously from margin constraints when a financial institution trades through an exchange. Our study enables to obtain tractable formulas for the value at risk and expected shortfall of a financial institution in the presence of fund liquidation. In particular, we find an additive decomposition for liquidation-adjusted risk measures. We show that such a measure can be expressed as a "fundamental" risk measure plus a liquidation risk adjustment that is proportional to the size of fund positions as a fraction of asset market depths. Our results can be used by risk managers in financial institutions to tackle liquidity events arising from fund liquidations better and adjust their portfolio allocations to liquidation risk more accurately.

Keywords: Liquidation risk; fire sales; value at risk; expected shortfall; risk management; price impact (search for similar items in EconPapers)
Date: 2018-06-03
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Published in International Journal of Theoretical and Applied Finance, 2018, 21 (03), pp.1850010. ⟨10.1142/S0219024918500103⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-02572794

DOI: 10.1142/S0219024918500103

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().