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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Effects of Liquidity on Risk Measurement |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 63 |
| Date | 2022 |
| Abstract Text | As many markets are not perfectly liquid, there is a necessity of adequate integration of market liquidity risk in risk measures. We discuss different approaches how liquidity risk can be incorporated into the value at risk and the expected shortfall and highlight their benefits and shortcomings. The theoretical discussion is then supplemented by an empirical study for the Swiss stock market. By performing various backtesting methods we check for the validity and performance of the different approaches. We conclude that there is a need of liquidity considerations in daily risk measures, especially in times of market turbulence and for smallcap stocks. As the relative importance of liquidity risk decreases for longer time horizons, we infer that liquidity risk can be incorporated roughly into risk measures by choosing long enough time horizons depending on the nature of the security. |
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