Risk management for whales

Rama Cont and Lakshithe Wagalath propose a portfolio risk model that integrates market risk with liquidation costs. Their model provides a framework for computing liquidation-adjusted risk measures such as liquidation-adjusted value-at-risk. Real-life examples reveal a substantial impact of liquidation costs on portfolio risk for portfolios with large concentrated positions

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The quantitative models commonly used in financial risk management have mainly focused on the statistical modelling of variations in the (mark-to-) market value of financial portfolios, in order to estimate a risk measure – such as value-at-risk or expected shortfall – related to market losses over a given time horizon. These risk measures are then used for determining, for example, capital requirements or margin requirements in order to provision for losses in extreme risk scenarios.

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