Liquidity-adjusted risk measures

Liquidity risk is an important type of risk, especially during times of crises. As observed by Acerbi and Scandolo (Quant Financ 8(7):681-691, 2008), it requires adjustments to classical portfolio valuation and risk measurement. Main drivers are two dimensions of liquidity risk, namely price impact of trades and limited access to financing. The key contribution of the current paper is the construction of a new, cash-invariant liquidity-adjusted risk measure that can naturally be interpreted as a capital requirement. We clarify the difference between our construction and the one of Acerbi and Scandolo (Quant Financ 8(7): 681-691, 2008) in the framework of capital requirements using the notion of eligible assets, as introduced by Artzner et al. (Astin Bull 39(1):101-116, 2009). Numerical case studies illustrate how price impact and limited access to financing influence the liquidity-adjusted risk measurements.