A Model for the Valuation of Assets with Liquidity Risk

Bert-Jan Nauta

MPRA Paper from University Library of Munich, Germany

Abstract: This paper describes a model for the valuation of assets on a bank balance sheet with liquidity risk. The new feature of this model is that it explicitly incorporates the funding term of an asset. The inclusion of the funding term is important since it determines the expected liquidation loss. By minimizing the sum of the expected liquidation loss and funding costs the optimal funding term and value of the asset can be determined. This paper applies the model to single cash flows, loans, bonds, and derivatives. Also, the calibration to LIBOR basis spreads is discussed.

Keywords: Valuation; Liquidity Risk; funding costs; discounting; FVA; XVA (search for similar items in EconPapers)
JEL-codes: G12 G13 G20 (search for similar items in EconPapers)
Date: 2016-09-18
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:92493

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