In the face of highly adverse moves, when risk managers are faced with the need to liquidate an equity portfolio, they often face significant slippage and additional losses due to lack of liquidity. Thus, it is common for firms to assess a liquidity addon component to the margin or capital requirement for a portfolio that holds large, concentration positions in illiquid securities. The common technique for this is to compare the size of a position in a security with the Average Daily Volume (ADV). In this paper I discuss the inadequacy of a simple ADV and propose a new method for calculating Liquidity addons.
The article was published in Risk.Net in Sept 2021 and can be found here:
However, if you don’t have access to Risk.net, you can view the article here