tailieunhanh - Lending values and liquidity risk

In this paper show how to derive a liquidity adjusted lending value in the case where the collateral is given by a single stock. | Journal of Applied Finance Banking 2014 209-241 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2014 Lending Values and Liquidity Risk Alessandro Juri1 Abstract In this paper we show how to derive a liquidity adjusted lending value in the case where the collateral is given by a single stock. Following 12 and 7 the collateral market value is adjusted as a function of the position size based on the existence of a one-parameter exponential supply curve. The lending value is then determined as usual . such that the probability that after a margin call the collateral value falls below the client exposure is at most 6 0. The curve parameter for a specific stock can be estimated from intraday data by means of a simple regression. Furthermore we show that an affine model where the liquidity parameter characterizing the exponential supply curve is assumed to be a function of the Average Daily Trading Volume ADTV has an excellent predictive power. This implies that the ADTV can be used for a simple and direct computation of the liquidity parameter avoiding the use of the intraday data. Concrete examples highlight the impact of liquidity risk on the lending value. Mathematics Subject Classification Cl G1 Keywords Lending Value Liquidity Lombard Lending 1 UBS Firm-wide Risk Control Methodology Credit Methodology Rating LGD. E-mail Article Info Received September 2 2013. Revised September 29 2013 Published online January 1 2014 210 Lending Values and Liquidity Risk 1 Introduction Lombard Lending is the standard terminology used in Switzerland for collateralized lending against liquid assets such as publicly traded stocks bonds etc. and is usually characterized by a variable credit limit expressed as a fixed percentage of the collateral market value the so called lending value. Briefly speaking at the beginning of the contract the client is assigned a fixed percentage called lending value which depends on the quality of the .