Market and Liquidity Risks Using Transaction-by-Transaction Information
The usual measures of market risk are based on the axiom of positive homogeneity while neglecting an important element of market information—liquidity. To analyze the effects of this omission, in the present study, we define the behavior of prices and volume via stochastic processes subordinated to...
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| Format: | Article |
| Language: | English |
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MDPI AG
2021-07-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/9/14/1678 |
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| author | Mariano González-Sánchez Eva M. Ibáñez Jiménez Ana I. Segovia San Juan |
| author_facet | Mariano González-Sánchez Eva M. Ibáñez Jiménez Ana I. Segovia San Juan |
| author_sort | Mariano González-Sánchez |
| collection | DOAJ |
| description | The usual measures of market risk are based on the axiom of positive homogeneity while neglecting an important element of market information—liquidity. To analyze the effects of this omission, in the present study, we define the behavior of prices and volume via stochastic processes subordinated to the time elapsing between two consecutive transactions in the market. Using simulated data and market data from companies of different sizes and capitalization levels, we compare the results of measuring risk using prices compared to using both prices and volumes. The results indicate that traditional measures of market risk behave inversely to the degree of liquidity of the asset, thereby underestimating the risk of liquid assets and overestimating the risk of less liquid assets. |
| first_indexed | 2024-03-10T09:32:45Z |
| format | Article |
| id | doaj.art-c9e214e395df4e0194d2682ce69f9fc2 |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-03-10T09:32:45Z |
| publishDate | 2021-07-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-c9e214e395df4e0194d2682ce69f9fc22023-11-22T04:20:30ZengMDPI AGMathematics2227-73902021-07-01914167810.3390/math9141678Market and Liquidity Risks Using Transaction-by-Transaction InformationMariano González-Sánchez0Eva M. Ibáñez Jiménez1Ana I. Segovia San Juan2Department of Business and Accounting, UNED (Universidad Nacional de Educación a Distancia), Paseo Senda del Rey, 11 Madrid, SpainDepartment of Business and Accounting, UNED (Universidad Nacional de Educación a Distancia), Paseo Senda del Rey, 11 Madrid, SpainDepartment of Business and Accounting, UNED (Universidad Nacional de Educación a Distancia), Paseo Senda del Rey, 11 Madrid, SpainThe usual measures of market risk are based on the axiom of positive homogeneity while neglecting an important element of market information—liquidity. To analyze the effects of this omission, in the present study, we define the behavior of prices and volume via stochastic processes subordinated to the time elapsing between two consecutive transactions in the market. Using simulated data and market data from companies of different sizes and capitalization levels, we compare the results of measuring risk using prices compared to using both prices and volumes. The results indicate that traditional measures of market risk behave inversely to the degree of liquidity of the asset, thereby underestimating the risk of liquid assets and overestimating the risk of less liquid assets.https://www.mdpi.com/2227-7390/9/14/1678liquidity riskvolumetradeintraday frequency |
| spellingShingle | Mariano González-Sánchez Eva M. Ibáñez Jiménez Ana I. Segovia San Juan Market and Liquidity Risks Using Transaction-by-Transaction Information Mathematics liquidity risk volume trade intraday frequency |
| title | Market and Liquidity Risks Using Transaction-by-Transaction Information |
| title_full | Market and Liquidity Risks Using Transaction-by-Transaction Information |
| title_fullStr | Market and Liquidity Risks Using Transaction-by-Transaction Information |
| title_full_unstemmed | Market and Liquidity Risks Using Transaction-by-Transaction Information |
| title_short | Market and Liquidity Risks Using Transaction-by-Transaction Information |
| title_sort | market and liquidity risks using transaction by transaction information |
| topic | liquidity risk volume trade intraday frequency |
| url | https://www.mdpi.com/2227-7390/9/14/1678 |
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