Liquidity Adjustment in Value at Risk(VaR) Model 部分内容如下： Liquidity Adjustment in Value at Risk( VaR) Model :
Evidence[rom Indian Debt Market
Sunan o Royl
Abstract
Conventional Value at Risk models are severely constrained while dealing with
liquidity risk. This inevitably leads to an underestimation of overall risk and consequently
misapplication of capital for the safety of financial institutions. Standard Value at Risk
model assumes that any quantity of securities can be traded without influencing market
prices. In reality, most markets are less than perfectly liquid and many securities cannot
be traded with ease in markets. This is especially true for emerging market economies
where the process of financial sector reform and deepening is currently taking place.
Despite episodic evidences of liquidity crisis in Indian financial markets, risks associated
with market illiquidity have not been effectively incorporated into the Value-at-Risk
(VaR) models. In the face of sudden and persisting off-market prices of some of the
securities in their portfolio, the Indian financial organizations often find it difficult to
offload these securities without booking significant trading losses. As a consequence,
several securities exhibit very low levels of turnover in the secondary segment of the debt
market. Also, in most cases, measures of market risk fail to capture the costs of carrying
illiquid assets in their portfolio. This becomes a constraining factor for market growth.
In this context, the paper attempts to construct a Liquidity adjusted VaR model
(L-VAR model) that incorporates liquidity risk in Value at Risk models. The paper tests
the performance of L-VAR model vis-a-vis existing VAR models. The paper observes
that in the Indian context, the liquidity risk is an important component of the aggregate
risks absorbed by the financial institutions.
I thank Professor Philippe Jorion, Dr. Fan Yu and Dr. Ashley Wang for useful discussions and suggestions. The usual disclaimer applies. |