Liquidity Risk Loss Estimation in Commercial Banks Using Stochastic Process Approach

Document Type : Research Paper

Authors

1 Ph.D. of Finance (Banking), Faculty of Management, University of Tehran, Tehran, Iran

2 Assistant Professor, Financial Management Department, Faculty of Finance Science, Kharazmi University, Tehran, Iran

Abstract

Liquidity is such vital for commercial banks to survive and continue to operate, hence measuring and managing liquidity risk is very important for them and this has become more important after the 2008 crisis.
This study, by defining the liquidity need index, which itself is a function of changes in the volume of bank assets and liabilities, has quantified the loss of liquidity risk. The main objective is to estimate the value of risk (VaR) and conditional value of risk (cVaR) as measure of liquidity risk losses in in one of the selected commercial banks for the next one-year period, using data from December 2011 to August 2016 .
To quantify the risk of liquidity, first, the bank's liquidity needs are predicted by stochastic process models and then, those scenarios that lead to a liquidity deficit are calculated. This deficit is compensated by the sale of part of bank’s assets and the loss from sales below the real price is considered as a measure for liquidity risk losses and VaR and cVaR are calculated through this meaure’s distribution.
This research has shown that optimal assets sale can bring significant economic savings to the bank and liquidity risk VaR decreases from 1,111 to 989 billion rials.

Keywords

References

 
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History

  • Receive Date: 06 March 2019
  • Revise Date: 10 July 2019
  • Accept Date: 14 July 2019

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