Steven Steven R Jackson#74

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What is liquidity-adjusted VaR (L-VaR)?

L-VaR adjusts Value-at-Risk to account for liquidity risk—the cost and slippage of unwinding positions. A portfolio may look safe under standard VaR, but in stressed markets, bid-ask spreads widen and depth vanishes. Example: selling $50m in EUR/PLN may move the market far beyond model assumptions. L-VaR factors in market impact, execution horizons, and spread changes. Institutions integrate it into regulatory capital frameworks and limit systems. For retail traders, L-VaR highlights why demo results differ from live—slippage turns theoretical edges into losses. Best practice: always assume higher exit costs in crises than in normal backtests.