medium · FRM Part 2 Liquidity & Treasury Risk
In the LVaR formula for a linear unwind over n days (LVaR = VaR_1d × √(((n+1)(2n+1))/(6n))), what does the factor account for?
- The correlation structure linking the different assets held in the portfolio
- The widening of bid-ask spreads and trading costs once a market crisis takes hold
- The risk reduction earned by shrinking the position size daily along the liquidation path
- The steady increase in market volatility as the liquidation horizon lengthens over the days
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