Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components

Doojin Ryu, Robert I. Webb, Jinyoung Yu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)

Abstract

This study constructs an extended value-at-risk model that incorporates all microstructural liquidity components using a high-quality tick-by-tick index options market dataset. Out-of-sample backtesting and mean-difference analyses suggest that the traditional value-at-risk measure significantly underestimates investors’ potential losses relative to our new liquidity-adjusted measure. Logistic regressions reveal that ex-ante market illiquidity increases violations of liquidity-adjusted value-at-risk and that these violations are often driven by foreign institutional investors.

Original languageEnglish
Pages (from-to)871-888
Number of pages18
JournalEuropean Journal of Finance
Volume28
Issue number9
DOIs
Publication statusPublished - 2022
Externally publishedYes

Keywords

  • Implied spread
  • liquidity risk
  • market microstructure
  • options market
  • risk management
  • value-at-risk

Fingerprint

Dive into the research topics of 'Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components'. Together they form a unique fingerprint.

Cite this