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| Author: | Duffie, D. Ziegler, A. |
| Title: | Liquidation Risk |
| Journal: | Financial Analysts' Journal
2003 : MAY-JUN, VOL. 59:3, p. 42-51 |
| Index terms: | RISK MEASUREMENT MANAGEMENT COMPANIES ENTERPRISE LIQUIDATION |
| Language: | eng |
| Abstract: | The authors investigate the impact on key risk measures-such as the likelihood of insolvency, value at risk (VAR), and expected tail loss-of spreads that are likely to widen just when positions must be liquidated to maintain capital ratios. They consider a simple model of a leveraged financial institution that holds cash, liquid assets, and illiquid assets and that is subject to minimum capital requirements. Using a Monte Carlo analysis of 10- day trading periods, we show that negative correlation between asset prices and bid-ask spreads may cause significant increases in all of these risk measures. They also show that high volatility in asset returns need not increase the impact of illiquidity on risk measures. |
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