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A Model for the Valuation of Assets with Liquidity Risk

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  • Nauta, Bert-Jan

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.

Suggested Citation

  • Nauta, Bert-Jan, 2016. "A Model for the Valuation of Assets with Liquidity Risk," MPRA Paper 92493, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92493
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    File URL: https://mpra.ub.uni-muenchen.de/92493/1/MPRA_paper_92493.pdf
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    References listed on IDEAS

    as
    1. Bert-Jan Nauta, 2015. "Liquidity Risk, Instead Of Funding Costs, Leads To A Valuation Adjustment For Derivatives And Other Assets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 1-30.
    2. Yang Chang & Erik Schlogl, 2014. "A Consistent Framework for Modelling Basis Spreads in Tenor Swaps," Research Paper Series 348, Quantitative Finance Research Centre, University of Technology, Sydney.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Valuation; Liquidity Risk; funding costs; discounting; FVA; XVA;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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