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Liquidity on the outside from the inside

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  • Joseph Simonian

Abstract

We describe an extension to a Liquidity-Adjusted Value-at-Risk (LVaR) model originally developed by Bangia et al. (1999) that incorporates liquidity risk into the traditional VaR model using random bid-ask spreads. By applying the Hellinger distance measure, we show how the bid-ask spread can be partially endogenized by adjusting it to reflect the influence of trade size on prices and ultimately on the measurement of market risk.

Suggested Citation

  • Joseph Simonian, 2011. "Liquidity on the outside from the inside," Applied Economics Letters, Taylor & Francis Journals, vol. 18(16), pages 1591-1593.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:16:p:1591-1593
    DOI: 10.1080/13504851.2011.554362
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    Keywords

    VaR; liquidity; bid-ask spread;
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