Liquidity-Adjusted Market Risk Measures With Stochastic Holding Period
Source: Banco Popolare
Within the context of risk integration, the authors introduce in risk measurement Stochastic Holding Period (SHP) models. This is done in order to obtain a 'Liquidity-adjusted risk measure' characterized by the absence of a fixed time horizon. The underlying assumption is that - due to changes on market liquidity conditions - one operates along an 'Operational time' to which the P&L process of liquidating a market portfolio is referred. This framework leads to a mixture of distributions for the portfolio returns, potentially allowing for skewness, heavy tails and extreme scenarios.