Intrinsic Liquidity in Conditional Volatility Models

Annals of Economics and Statistics, Vol. 123/124, Dec. 2016, 225-246

28 Pages Posted: 20 Nov 2017

See all articles by Serge Darolles

Serge Darolles

Université Paris Dauphine - DRM-CEREG

Christian Francq

University of Lille III

Gaëlle Le Fol

Université Paris Dauphine - Department of Finance; National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Jean-Michel Zakoïan

CREST; University of Lille III

Date Written: Decmber 2016

Abstract

Until recently the liquidity of financial assets has typically been viewed as a second-order consideration. Liquidity was frequently associated with simple transaction costs that impose - temporary if any- effect on asset prices, and whose shocks could be easily diversified away. Yet the evidence- especially the recent liquidity crisis- suggests that liquidity is now a primary concern. This paper aims at disentangling market risk and liquidity risk in the context of conditional volatility models. Our approach allows the isolation of the intrisic liquidity of any asset, and thus makes it possible to deduce a liquidity risk even when volumes are not observed.

Keywords: GARCH, Liquidity, Quasi-Maximum Likelihood, Risk measures, Value-at-Risk

JEL Classification: C01, C22, C58, G11

Suggested Citation

Darolles, Serge and Francq, Christian and Le Fol, Gaëlle and Zakoïan, Jean-Michel, Intrinsic Liquidity in Conditional Volatility Models (Decmber 2016). Annals of Economics and Statistics, Vol. 123/124, Dec. 2016, 225-246, Available at SSRN: https://ssrn.com/abstract=3073018

Serge Darolles

Université Paris Dauphine - DRM-CEREG ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Christian Francq (Contact Author)

University of Lille III ( email )

Domaine du Pont de bois
Villeneuve D'Ascq Cedex, 59653
France

Gaëlle Le Fol

Université Paris Dauphine - Department of Finance ( email )

Université Paris-Dauphine, Université PSL
Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Jean-Michel Zakoïan

CREST ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

HOME PAGE: http://www.crest.fr/pageperso/zakoian/zakoian.htm

University of Lille III ( email )

Domaine du Pont de bois
Villeneuve d'Ascq, 59653
France

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