Strategic Corporate Decision Making With Market and Liquidity Risk Management

Abstract

This chapter examines a practical methodology for the assessment and control of market and liquidity risk exposures for financial trading portfolios that consist of certain equity assets. The applied technique is based on the contemporary concept of liquidity-adjusted value at risk (LVaR) along with the application of optimization risk-engine algorithms. This chapter proposes a broad market and liquidity risk management model that can concurrently perform LVaR estimation under regular and stressed market scenarios. It takes into account the effects of illiquidity of traded equity assets. In order to demonstrate the appropriate application of LVaR and stress-testing techniques, real-world case analysis of trading risk management are presented for the Gulf Cooperation Council (GCC) stock markets. To this end, a number of optimization case studies are examined with the aim of developing a novel technique of trading risk measurement as well as the implementation of a risk optimization process for the computation of the maximum permitted LVaR limits.