Liquidity-Adjusted Market Risk Measures With Stochastic Holding Period

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.