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Oct 29

A Fully Integrated Liquidity and Market Risk Model

Posted by abiao at 08:40 | Paper Review | Comments(0) | Reads(6604)
An excellent and practical paper by Attilio Meucci, "A Fully Integrated Liquidity and Market Risk Model" forthcoming in Financial Analysts Journal.

Going beyond the simple bid–ask spread overlay for a particular Value at Risk, the author introduces an innovative framework that integrates liquidity risk, funding risk, and market risk. He overlaid a whole distribution of liquidity uncertainty on future market risk scenarios and allowed the liquidity uncertainty to vary from one scenario to another, depending on the liquidation or funding policy implemented. The result is one easy-to-interpret, easy-to-implement formula for the total liquidity-plus-market-risk profit and loss distribution.

Journal paper, Working paper

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