Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/66666
Authors: 
Völker, Florian
Cremers, Heinz
Panzer, Christof
Year of Publication: 
2012
Series/Report no.: 
Working Paper series, Frankfurt School of Finance & Management 198
Abstract (Translated): 
Most traditional Value at Risk models neglect market liquidity risk and hence only consider the market price risk (i.e. risk associated with holding a certain position). In order to fully capture the market risk associated to holding and trading a position, we first define market liquidity risk, its dimensions (tightness, depth, resiliency, immediacy) and causes (exogenous / endogenous). We then present and evaluate different liquidity-adjusted Value at Risk models which capture one or more dimensions of market liquidity risk and thereby present a more true view on the overall market risk. This paper also spotlights how Basel III regulation defines liquid assets, derived from the Liquidity Coverage Ratio (LCR) framework, and evaluates if this regulation adequately reflects market liquidity risk. We conclude that the LCR concept is flawed as the defined buckets of liquid assets do not reflect the true liquidity of certain assets. Furthermore it can be said that the defined buckets might result in heightened systematic risk as banks will focus on certain asset classes. Additionally the corporate fixed income sector might experience a crowding out as these assets will appear less rewarding to banks.
Subjects: 
Market Risk
Market Liquidity Risk
Market Microstructure
Liquidity-adjusted Value-at-Risk
Basel III
Liquidity Coverage Ratio
Liquid Assets
JEL: 
C1
C14
C16
D4
G1
G32
Document Type: 
Working Paper

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