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Measurement of Liquidity-Adjusted Market Risk by VaR and Expected Shortfall: Evidence from Turkish Banks

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  • Cihan Aktas
  • Orcan Cortuk
  • Suat Teker
  • Burcu Deniz Yildirim

Abstract

Due to its known weaknesses Value at Risk (VaR) has been modified to have a better market risk measurement model. 2007-2008 global financial crisis has increased the necessity to incorporate market liquidity into widely used models. This is to raise the required regulatory capital for trading portfolios since large marked-to-market losses have been observed to hit the global financial system. In line with the new coming regulations, this study applies a Monte-Carlo based approach on Turkish Banks’ hypothetical trading portfolios to measure their total market risk. The results of designed risk measurement process are reported for VaR and Expected Shortfall (ES) models in comparative to their liquidity adjusted values. Finally, the results imply that the capital adequacy ratios of Turkish banks indicate a solid loss absorbency capacity although liquidity-adjusted market risk is relatively higher than the currently measured one. Nevertheless, possible deteriorations due to sudden extreme shocks on the banks’ trading portfolios should be frequently analyzed on a more elaborate basis by taking market liquidity into account.

Suggested Citation

  • Cihan Aktas & Orcan Cortuk & Suat Teker & Burcu Deniz Yildirim, 2012. "Measurement of Liquidity-Adjusted Market Risk by VaR and Expected Shortfall: Evidence from Turkish Banks," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 2(5), pages 1-8.
    • Handle: RePEc:spt:apfiba:v:2:y:2012:i:5:f:2_5_8
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    Cited by:

    1. Theo Berger & Christina Uffmann, 2021. "Assessing liquidity‐adjusted risk forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(7), pages 1179-1189, November.
    2. Rouetbi Emnal & Mamoghli Chokri, 2014. "Measuring Liquidity Risk in an Emerging Market: Liquidity Adjusted Value at Risk Approach for High Frequency Data," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 40-53.

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