Adjusting value-at-risk for market liquidity

Adjusting value-at-risk for market liquidity

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The Asian and Russian crises of the late 1990s, and the Long-Term Capital Management (LTCM) debacle, demonstrated the need to better understand market liquidity risk. Several methodologies have been suggested that include market liquidity effects in value-at-risk. Some of them rely on bid-ask spreads (Bangia et al, 1999, and Monkkonen, 2000). These approaches raise the difficulty of gathering long time series of bid/ask spreads for different portfolio sizes and securities. Moreover, they are

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