Jump liquidity risk and its impact on CVaR

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Title: Jump liquidity risk and its impact on CVaR
Authors: Zheng, H
Shen, Y
Item Type: Journal Article
Abstract: Purpose – The aim is to study jump liquidity risk and its impact on risk measures: value at risk (VaR) and conditional VaR (CVaR). Design/methodology/approach – The liquidity discount factor is modelled with mean revision jump diffusion processes and the liquidity risk is integrated in the framework of VaR and CVaR. Findings – The standard VaR, CVaR, and the liquidity adjusted VaR can seriously underestimate the potential loss over a short holding period for rare jump liquidity events. A better risk measure is the liquidity adjusted CVaR which gives a more realistic loss estimation in the presence of the liquidity risk. An efficient Monte Carlo method is also suggested to find approximate VaR and CVaR of all percentiles with one set of samples from the loss distribution, which applies to portfolios of securities as well as single securities. Originality/value – The paper offers plausible stochastic processes to model liquidity risk.
Issue Date: 31-Dec-2008
Date of Acceptance: 1-Jan-2008
URI: http://hdl.handle.net/10044/1/55451
DOI: https://dx.doi.org/10.1108/15265940810916139
ISSN: 1526-5943
Publisher: Emerald
Start Page: 477
End Page: 492
Journal / Book Title: Journal of Risk Finance
Volume: 9
Copyright Statement: © Emerald Group Publishing Limited 2008. Harry Zheng, Yukun Shen, (2008) "Jump liquidity risk and its impact on CVaR", The Journal of Risk Finance, Vol. 9 Issue: 5, pp.477-492, https://doi.org/10.1108/15265940810916139
Keywords: Liquidity
Monte Carlo methods
Risk analysis
1502 Banking, Finance And Investment
Publication Status: Published
Article Number: 5
Appears in Collections:Financial Mathematics
Mathematics
Faculty of Natural Sciences



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