Bridge over ocean
1 November 2012 Financial Analysts Journal Volume 68, Issue 6

A Fully Integrated Liquidity and Market Risk Model

  1. Attilio Meucci, CFA, PhD

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.

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