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A proposal for impact-adjusted valuation: Critical leverage and execution risk

Abstract:

The practice of valuation by marking-to-market with current trading prices is seriously flawed. Under leverage the problem is particularly dramatic: due to the concave form of market impact, selling always initially causes the expected leverage to increase. There is a critical leverage above which it is impossible to exit a portfolio without leverage going to infinity and bankruptcy becoming likely. Standard risk-management methods give no warning of this problem, which easily occurs for aggr...

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Authors


Caccioli, F More by this author
Bouchaud, JP More by this author
More by this author
Institution:
University of Oxford
Department:
Oxford, MPLS, Mathematical Inst
Publication date:
2012-04-04
URN:
uuid:a389afb1-7dc3-4464-b82c-109975b179b1
Source identifiers:
387684
Local pid:
pubs:387684
Keywords:

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