大浩浩的笔记课堂——FRM考试学习笔记123

Topic 52 Estimating Liquidity Risks

1.Liquidity and liquidity risks:

⑴liquidity:

①definition:

It is the ability of a trader to execute a trade or liquidate a position with little or no cost,risk or inconvenience.

②categories:

A.exogenous liquidity:

It refers to the bid-ask spread not being affected by the individual trades made by investors.This is more likely to be the case when the trades are relatively small.

B.endogenous liquidity:

a/ definition:

It refers to when a given trade can influence the liquidity risk of the trade.

b/ example:

a trader submitting a buy or sell order that increases the spread

③challenge:

A.The main challenge in estimating liquidity is finding the best method.

B.One approach is finding adjustments to add on to the basic VaR.The 

researcher must understand how the inputs affect the ″add-on″ and if there are more than one,how the add-ons interact.

⑵liquidity risk:

①definition:

It is the lack of a market for a security to prevent it from being bought or sold quickly enough to prevent or minimize a loss.

②reason:

It could result from asset allocation,funding strategies,collateral policies,or mismanagement of risks.

③categories:

A.transaction liquidity risk:

It is the risk that the act of buying or selling an asset will result in an adverse price move.

B.balance sheet risk/funding liquidity risk:

It results when a borrower´s credit position is either deteriorating or is perceived by market participants to be deteriorating.

2.Estimating liquidity adjusted VaR:

liquidity adjusted VaR=VaR+liquidity cost(LC):

⑴exogenous price(LVaR is higher):

①constant spread approach:

A.assumption:

The bid-ask spread is constant.

B.formula:

C.factors:

·特别注意！

·liquidity adjustment:

The liquidity adjustment will increase(decrease) when there is an increase(decrease) in the spread,a decrease(increase) in the confidence level,and a decrease(increase) in the holding period.

②random spread approach:

A.definition:

LVaR can also be calculated given the distributional characteristics of spread.

B.formula:

If you are given the mean and standard deviation of the spread,apply the follow:

⑵endogenousprice(LVaR is lower):

⑶the liquidity discount approach

3.Estimating liquidity-at-risk(LaR):

⑴LaR:

①another name:

It is also known as cash flow at risk(CFaR),it is the cash-flow version of VaR.

②definition:

It is the maximum likely cash outflow over the horizon period at a specified confidence level:

For a hedged portfolio,the LaR can differ significantly from the VaR:

A.A bond hedged with a futures contract has low VaR but high VaR.

B.A hedging instruments do not result in potential cash outflows over the measurement period.

③example:

The 1-day LaR at the 95% confidence means that the maximum likely cash outflow over the next day,at the 95% confidence level.

④characteristics:

A.LaR is similar to VaR,but instead of a change in value,it deals with cash flows.

B.LaR is concerned with a cash flow shortfall,VaR is concerned with a loss in value.

C.A positive(negative) value for LaR means that the worst outcome will be associated with an outflow(inflow) of cash.

⑤factors:

borrowing or lending,margin requirements,collateral obligations,unexpected cash flows,and changes in risk management policy

⑵VaR and LaR:

·特别注意！

·So,the LaR can be much greater than the VaR or much less than it,depending on the circumstances.

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