[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2105.08377.html
   My bibliography  Save this paper

Liquidity Stress Testing in Asset Management -- Part 2. Modeling the Asset Liquidity Risk

Author

Listed:
  • Thierry Roncalli
  • Amina Cherief
  • Fatma Karray-Meziou
  • Margaux Regnault
Abstract
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers the asset-liability management of the liquidity gap risk (or asset-liability matching). The purpose of this research is to propose a methodological and practical framework in order to perform liquidity stress testing programs, which comply with regulatory guidelines (ESMA, 2019, 2020) and are useful for fund managers. The review of the academic literature and professional research studies shows that there is a lack of standardized and analytical models. The aim of this research project is then to fill the gap with the goal of developing mathematical and statistical approaches, and providing appropriate answers. In this second article focused on asset liquidity risk modeling, we propose a market impact model to estimate transaction costs. After presenting a toy model that helps to understand the main concepts of asset liquidity, we consider a two-regime model, which is based on the power-law property of price impact. Then, we define several asset liquidity measures such as liquidity cost, liquidation ratio and shortfall or time to liquidation in order to assess the different dimensions of asset liquidity. Finally, we apply this asset liquidity framework to stocks and bonds and discuss the issues of calibrating the transaction cost model.

Suggested Citation

  • Thierry Roncalli & Amina Cherief & Fatma Karray-Meziou & Margaux Regnault, 2021. "Liquidity Stress Testing in Asset Management -- Part 2. Modeling the Asset Liquidity Risk," Papers 2105.08377, arXiv.org.
    • Handle: RePEc:arx:papers:2105.08377
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2105.08377
    File Function: Latest version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Rama Cont & Arseniy Kukanov & Sasha Stoikov, 2014. "The Price Impact of Order Book Events," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 47-88.
    4. Roncalli, Thierry, 2013. "Introduction to Risk Parity and Budgeting," MPRA Paper 47679, University Library of Munich, Germany.
    5. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    6. Mathias Pohl & Alexander Ristig & Walter Schachermayer & Ludovic Tangpi, 2017. "The amazing power of dimensional analysis: Quantifying market impact," Papers 1702.05434, arXiv.org, revised Sep 2017.
    7. Michael A. Goldstein & Edith S. Hotchkiss & David J. Pedersen, 2019. "Secondary Market Liquidity and Primary Market Pricing of Corporate Bonds," JRFM, MDPI, vol. 12(2), pages 1-17, May.
    8. Edith Hotchkiss & Gergana Jostova, 2017. "Determinants of Corporate Bond Trading: A Comprehensive Analysis," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-30, June.
    9. Menyah, Kojo & Paudyal, Krishna, 2000. "The components of bid-ask spreads on the London Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1767-1785, November.
    10. Paul Jusselin & Mathieu Rosenbaum, 2020. "No‐arbitrage implies power‐law market impact and rough volatility," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1309-1336, October.
    11. Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
    12. Nicolae Gârleanu & Lasse Heje Pedersen, 2013. "Dynamic Trading with Predictable Returns and Transaction Costs," Journal of Finance, American Finance Association, vol. 68(6), pages 2309-2340, December.
    13. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
    14. Thierry Roncalli, 2021. "Liquidity Stress Testing in Asset Management -- Part 3. Managing the Asset-Liability Liquidity Risk," Papers 2110.01302, arXiv.org.
    15. Esteban Moro & Javier Vicente & Luis G. Moyano & Austin Gerig & J. Doyne Farmer & Gabriella Vaglica & Fabrizio Lillo & Rosario N. Mantegna, 2009. "Market impact and trading profile of large trading orders in stock markets," Papers 0908.0202, arXiv.org.
    16. Bence Toth & Yves Lemperiere & Cyril Deremble & Joachim de Lataillade & Julien Kockelkoren & Jean-Philippe Bouchaud, 2011. "Anomalous price impact and the critical nature of liquidity in financial markets," Papers 1105.1694, arXiv.org, revised Nov 2011.
    17. Amy K. Edwards & Lawrence E. Harris & Michael S. Piwowar, 2007. "Corporate Bond Market Transaction Costs and Transparency," Journal of Finance, American Finance Association, vol. 62(3), pages 1421-1451, June.
    18. Marie Brière & Charles Albert Lehalle & Tamara Nefedova & Amine Raboun, 2020. "Modelling Transaction Costs When Trades May Be Crowded: A Bayesian Network Using Partially Observable Orders Imbalance," Post-Print hal-03356621, HAL.
    19. Fédéric Bucci & Michael Benzaquen & Fabrizio Lillo & Jean-Philippe Bouchaud, 2019. "Crossover from Linear to Square-Root Market Impact," Post-Print hal-02323405, HAL.
    20. Farshid Abdi & Angelo Ranaldo, 2017. "A Simple Estimation of Bid-Ask Spreads from Daily Close, High, and Low Prices," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4437-4480.
    21. Bikker, Jacob A. & Spierdijk, Laura & van der Sluis, Pieter Jelle, 2007. "Market impact costs of institutional equity trades," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 974-1000, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thierry Roncalli, 2021. "Liquidity Stress Testing in Asset Management -- Part 3. Managing the Asset-Liability Liquidity Risk," Papers 2110.01302, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fabrizio Lillo, 2021. "Order flow and price formation," Papers 2105.00521, arXiv.org.
    2. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Henri Waelbroeck, 2013. "How efficiency shapes market impact," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1743-1758, November.
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    4. Wang, Junbo & Wu, Chunchi, 2015. "Liquidity, credit quality, and the relation between volatility and trading activity: Evidence from the corporate bond market," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 183-203.
    5. de Jong, F.C.J.M. & Driessen, J.J.A.G., 2015. "Can large long-term investors capture illiquidity premiums," Other publications TiSEM 9c92b978-0099-44d3-9aab-8, Tilburg University, School of Economics and Management.
    6. Yann Braouezec & Lakshithe Wagalath, 2016. "Risk-based capital requirements and optimal liquidation in a stress scenario," Working Papers 2016-ACF-01, IESEG School of Management.
    7. Stephanie Heck, 2022. "Corporate bond yields and returns: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 179-201, June.
    8. Reichenbacher, Michael & Schuster, Philipp, 2022. "Size-adapted bond liquidity measures and their asset pricing implications," Journal of Financial Economics, Elsevier, vol. 146(2), pages 425-443.
    9. Díaz, Antonio & Escribano, Ana, 2020. "Measuring the multi-faceted dimension of liquidity in financial markets: A literature review," Research in International Business and Finance, Elsevier, vol. 51(C).
    10. Lakshithe Wagalath, 2017. "Lost In Contagion? Building A Liquidation Index From Covariance Dynamics," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-26, February.
    11. Goldstein, Itay & Jiang, Hao & Ng, David T., 2017. "Investor flows and fragility in corporate bond funds," Journal of Financial Economics, Elsevier, vol. 126(3), pages 592-613.
    12. Strobl, Günter, 2022. "A theory of procyclical market liquidity," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    13. Wei Cui & Sören Radde, 2020. "Search-based Endogenous Asset Liquidity and the Macroeconomy [Why Don’t US Issuers Demand European Fees for IPOs?]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2221-2269.
    14. Stanis{l}aw Dro.zd.z & Jaros{l}aw Kwapie'n & Marcin Wk{a}torek, 2023. "What is mature and what is still emerging in the cryptocurrency market?," Papers 2305.05751, arXiv.org.
    15. Broto, Carmen & Lamas, Matías, 2020. "Is market liquidity less resilient after the financial crisis? Evidence for US Treasuries," Economic Modelling, Elsevier, vol. 93(C), pages 217-229.
    16. Thibault Jaisson, 2014. "Market impact as anticipation of the order flow imbalance," Papers 1402.1288, arXiv.org.
    17. Gabor Pinter & Chaojun Wang & Junyuan Zou, 2024. "Size Discount and Size Penalty: Trading Costs in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(7), pages 2156-2190.
    18. O’Sullivan, Conall & Papavassiliou, Vassilios G. & Wafula, Ronald Wekesa & Boubaker, Sabri, 2024. "New insights into liquidity resiliency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).
    19. Weibing Huang & Charles-Albert Lehalle & Mathieu Rosenbaum, 2015. "Simulating and Analyzing Order Book Data: The Queue-Reactive Model," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 110(509), pages 107-122, March.
    20. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).

    More about this item

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2105.08377. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.