On the Market Price of Liquidity Risk and Illiquidity Index
Institutional traders consider liquidity in addition to prices when they trade. Their large trades create price impacts, which incur the risks of slippage and unfavorable market conditions that adversely affect their profit. We propose a generic framework to model the market price of liquidity risk. By setting the framework's parameters appropriately, we obtain different closed-form solutions of price impact function and the market price of liquidity risk. One particular price impact function is concave with respect to the order flow. We also find a proportional relationship between illiquidity and volatility. These features of our model are qualitatively consistent with existing empirical evidence. (joint work with Christopher Ting) Kijima Slides
Masaaki Kijima is a Professor of Financial Engineering at Tokyo Metropolitan University. He received PhD from the Simon business school, University of Rochester in 1986. Since then, he has held multiple professorships with the leading economic and mathematical departments, including Tokyo Institute of Technology and Kyoto University.
He is the author of two books entitled “Markov Processes for Stochastic Modeling” in 1997 and “Stochastic Processes with Applications to Finance” in 2013, both published from Chapman & Hall, London. He has published more than 100 papers in international journals specializing applied probability and financial engineering.