Attilio Meucci Liquidity-, Funding- and Market-Risk
Attilio Meucci
Fully Integrated Liquidity- and Market-Risk Model
PUBLISHED: Financial Analyst Journal , November 2012
STUDY IT: http://symmys.com/node/350 (white paper and code)
DO IT: Advanced Risk and Portfolio Management® Bootcamp www.symmys.com/arpm-bootcamp
The 19th Annual Workshop on Financial Engineering: Quantitative Asset Management
Columbia Engineering, November 9 2012
Attilio Meucci Liquidity-, Funding- and Market-Risk
today time
investment horizon
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
investment horizon
time
loss
portfolio value in scenario 1
portfolio value in scenario 2
portfolio value in scenario 3
paths of market risk drivers
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
P&L distribution
Tail risk
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
value in scenario 1 unknown due to liquidity
value in scenario 2 unknown due to liquidity
value in scenario 3 unknown due to liquidity
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
liquid securities display
small price uncertainty
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
illiquid securities display
large price uncertainty
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
liquidity hits only in undesirable direction
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
liquidity hits harder when we are in trouble
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
profit
loss
market risk
liquidity risk “+”
?
Conceptual issues in liquidity modeling
Attilio Meucci Liquidity-, Funding- and Market-Risk
Paths of market risk drivers (interest rates, stock returns, implied volatility surfaces,…)
probability of paths
joint scenario of N risk drivers probability of joint scenario
Market risk as Fully Flexible Probabilities (FFP)
Attilio Meucci Liquidity-, Funding- and Market-Risk
Paths of market risk drivers (interest rates, stock returns, implied volatility surfaces,…)
probability of paths
Market P&L of each security
Market risk as Fully Flexible Probabilities (FFP)
Attilio Meucci Liquidity-, Funding- and Market-Risk
Paths of market risk drivers (interest rates, stock returns, implied volatility surfaces,…)
probability of paths
Market P&L of each security
Market P&L of portfolio
market risk
profit
loss
Market risk as Fully Flexible Probabilities (FFP)
Attilio Meucci Liquidity-, Funding- and Market-Risk
Liquidity adjustment depends on - market conditions - liquidation policy
Market-dependent corrections (VIX, liquidity indices,…)
Liquidity as market impact
Literature on market impact
Liquidity adjustment of portfolio
Attilio Meucci Liquidity-, Funding- and Market-Risk
liquidity risk
market risk “+” =
portfolio total P&L
market risk P&L
liquidity risk adjustment
Total risk = market + liquidity
Attilio Meucci Liquidity-, Funding- and Market-Risk
liquidity risk
market risk “+” =
portfolio total P&L
market risk P&L
liquidity risk adjustment
Total P&L distribution = mixture of bells with different centers and widths
Total risk = market + liquidity
Attilio Meucci Liquidity-, Funding- and Market-Risk
liquidity risk
market risk “+” =
portfolio total P&L
market risk P&L
liquidity risk adjustment
Total P&L distribution = mixture of bells with different centers and widths
Illiquidity score
Illiquidity score
Tail risk
Attilio Meucci Liquidity-, Funding- and Market-Risk
liquidity risk
market risk “+” =
portfolio total P&L
market risk P&L
liquidity risk adjustment
Market-Liquidity risk decomposition
Marginal contributions
Attilio Meucci Liquidity-, Funding- and Market-Risk
liquidity risk
market risk “+” =
portfolio total P&L
market risk P&L
liquidity risk adjustment
Market-Liquidity risk decomposition
Marginal contributions
Attilio Meucci Liquidity-, Funding- and Market-Risk Case studies
Attilio Meucci Liquidity-, Funding- and Market-Risk Case studies
Attilio Meucci Liquidity-, Funding- and Market-Risk Case studies
Attilio Meucci Liquidity-, Funding- and Market-Risk Case studies
Attilio Meucci Liquidity-, Funding- and Market-Risk References
PUBLISHED: Financial Analyst Journal, November 2012
STUDY IT: http://symmys.com/node/350 (white papers and code)
DO IT: Advanced Risk and Portfolio Management® Bootcamp www.symmys.com/arpm-bootcamp
