TY - JOUR T1 - Integrating Liquidity Risk Factor into a Parametric Value at Risk Method JF - The Journal of Trading SP - 76 LP - 87 DO - 10.3905/jot.2008.708838 VL - 3 IS - 3 AU - Mazin A.M. Al Janabi Y1 - 2008/06/30 UR - https://pm-research.com/content/3/3/76.abstract N2 - Liquidity trading risk arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate trading assets quickly and with minimal loss in value. Recent turmoil in financial markets endorses the need for rigorous handling and integration of liquidity trading risk into Value at Risk (VAR) models. The authors argue that liquidity risk associated with the uncertainty of liquidating multiple assets over a given holding period, particularly for thinly traded or emerging markets securities under adverse market conditions, is a key factor in formalizing and measuring overall trading risk and is thus an important component to model. This article proposes a practical framework for the quantification of liquidity trading risk management for portfolios that consist of multiple assets. We present a method whereby the holding periods are adjusted according to the specific needs of each trading portfolio. This article extends previous approaches by explicitly modeling the liquidation of trading portfolios, over the holding period, with the aid of an appropriate scaling of multiple assets' VAR matrix. Using more than three years of daily return data (for the period 2004–2006) of emerging Gulf Cooperation Council stock markets, the authors analyze different trading portfolios and determine the risk exposure under different illiquid and adverse market conditions.TOPICS: VAR and use of alternative risk measures of trading risk, portfolio construction, analysis of individual factors/risk premia ER -