Examining liquidity risk and calculating value at risk of portfolio taking into account the liquidity aspect of equities
School of Economics, Business Administration and Legal Studies, Executive MBA
This dissertation w
as written as
part of the EMBA
at the International Hellenic
The recent crisis has high
ed the importance of liquidity
functioning of financial markets and the banking sector.
faced problems because they
did not manage their liquidity
depended too much
term sources of funding and on funding from other
institutions and at the same time they did not hold sufficient stocks of liquid assets to
in a position to handle
a deterioration in funding conditions. The
many funding markets in 2007
08 demonstrated how quickly liquidity can
and proved that the institutions have to change their approach
on managing liquidity
Having experienced these events
the global financial system is entering a new
era in which liquidity will be a key element.
During the last few years, value at risk
a favored tool for measuring market risk across financial institutions.
However, the classical VaR modeling ignores the presence of a liquidity component.
This component arises from the hypothesis that the theoretical selling off implied by the VaR
place at the mid-price.
The main goal of this dissertation is
investigate the aspect of
the liquidity of a portfolio of assets and more specifically of stocks. In the first part we present liquidity and associated risk along with the main
measures of liquidity.
In the second part we introduce
Value at Risk concept of a
portfolio and how to incorporate liquidity in its calculation. Differe
nt models are
presented. The third part is the empirical analysis. The collected time series data were
used to calculate VaR and LVaR with different methods and for different portfolios
illustrate how liquidity can increase the calculated
value at risk
of a portfolio