Liquidity on the outside from the inside

摘要

We describe an extension to a Liquidity-Adjusted Value-at-Risk (LVaR) model originally developed by Bangia et al. (1999) that incorporates liquidity risk into the traditional VaR model using random bid-ask spreads. By applying the Hellinger distance measure, we show how the bid-ask spread can be partially endogenized by adjusting it to reflect the influence of trade size on prices and ultimately on the measurement of market risk.