Abstract
Abstract This paper develops a high-frequency risk measure: the Liquidity-adjusted Intraday Value at Risk (LIVaR). Our objective is to explicitly consider the endogenous liquidity dimension associated with order size. By reconstructing the open Limit Order Book of Deutsche Borse, changes in the tick-by-tick (ex-ante) frictionless return and actual return are modeled jointly. The risk related to the ex-ante liquidity premium is then quantified. Our model can be used to identify the impact of ex-ante liquidity risk on total risk, and to provide an estimation of the VaR for the actual return at a point in time. In our sample, liquidity risk can account for up to 32% of total risk depending on order size.
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