Title: Illiquid asset and portfolio management
Authors: Christian Brownlees - UPF (Spain)
Serge Darolles - Paris Dauphine (France)
Gaelle Le Fol - Universite Paris - Dauphine, and CREST (France) [presenting]
Beatrice Sagna - Universite Paris - Dauphine (France)
Abstract: The aim is to promote a better analysis of financial risk focused on one specific dimension: liquidity risk. We introduce a multivariate model to analyze the liquidity structure of a large panel of assets. These could be liquidity measures of different assets on one trading venue as well as liquidity measures of the same assets over different venues. The highlight of the modeling approach is that it disentangles the dynamics of liquidity in a systematic market wide liquidity factor component as well as individual network liquidity spillover effects among the series in the panel. The model allows to study the joint dynamics of the liquidity measures in the panel as well as predicting the future degree of liquidity. Some applications of our methodology include the design of basket VWAP (Volume Weighted Average Price) trading strategies, aiming at lowering the market impact, and the optimal management of collateral.