Going beyond the simple bid–ask spread overlay for a particular value at
risk, the author introduces an innovative framework that integrates liquidity
risk, funding risk, and market risk. He overlaid a whole distribution of
liquidity uncertainty on future market risk scenarios and allowed the liquidity
uncertainty to vary from one scenario to another, depending on the liquidation
or funding policy implemented. The result is one easy-to-interpret,
easy-to-implement formula for the total liquidity-plus-market-risk profit and
loss distribution.