A1149
Title: Stock liquidity and value at risk for options
Authors: Shih-Ping Feng - Feng Chia University (Taiwan) [presenting]
Abstract: Traditional Value at Risk (VaR) estimates for options assume that the underlying stock has perfect liquidity, but in reality, investors trade stock with liquidity risk. Empirical studies have clearly documented that the liquidity risk of the underlying assets plays a role in the distribution of stock and option returns. A method is presented for calculating liquidity-adjusted VaR estimates for options that account for the imperfect liquidity of the underlying asset. The imperfect liquidity of an asset is assumed to result from an imbalance in market demand and supply. Empirically, the predictive accuracy of the proposed liquidity-adjusted VaR estimates for options is compared with traditional VaR estimates. The empirical results show that the proposed liquidity-adjusted VaR estimates achieve a relatively good fit, especially when the underlying stock exhibits lower levels of liquidity.
