Liquidation discount-a novel application of ARFIMA-GARCH
MetadataShow full item record
Urgent liquidation of a large stock portfolio entails a liquidity cost-i.e., a "liquidation discount". This is the market impact discount in value yielded by the immediate sale of the portfolio relative to its in-hand market value calculated from prevailing market prices. For any portfolio, the day-to-day liquidation discount "at risk" (i.e., the liquidation discount that would be suffered if liquidation were undertaken) is variable. This liquidation discount risk is additional to price risk and will be of concern to portfolio managers that may, at short notice, wish to convert substantial stockholdings to cash. We obtain daily time series of instantaneous log liquidation discount for variously sized portfolios of Australian stocks and determine that these time series are best modeled with an Autoregressive Fractionally Integrated Moving Average-Generalized Autoregressive Conditional Heteroskedasticity (ARFIMA-GARCH) process. We then formulate a liquidation discount-at-risk measure with which portfolio managers can budget for the future cost of portfolio liquidity for a chosen liquidation horizon and confidence level.
Showing items related by title, author, creator and subject.
Chan, Felix; Gould, John; Singh, Ranjodh; Yang, J. (2013)This paper proposes an approach for quantifying liquidity risk. Urgent liquidation of a portfolio will entail a liquidation discount. This is the market impact discount in value yielded by the immediate sale of the portfolio ...
Dokuchaev, Nikolai (2008)We study an optimal investment problem for a continuous-time incomplete market model such that the risk-free rate, the appreciation rates and the volatility of the stocks are all random; they are not necessarily adapted ...
Maybee, Bryan; Fava, L. (2011)As underground mine planning tools become more sophisticated, mine planners have the capacity to investigate numerous mine sequencing options to identify the best strategy for a given project, creating higher value for ...