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My company is looking to launch a new long only global equity fund. The product committee wishes to see a risk analysis covering various risks, including liquidity. The main measure is time to liquidate (i.e. how long will it take to sell this portfolio).

For normal market conditions it is straightforward: I look at average volume for each ISIN, assume a participation rate somewhere between 10% and 20% and I get my metric.

However how do you stress this metric to get a time to liquidate in fire sales conditions? Should I assume that the participation rate will be significantly lower? if yes by how much and why?

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If you are concerned about how fast can you convert your equity holdings into cash, then you would care about the ADV (average daily volume) and cost would be a secondary issue.

What you can do is to look at historical ADV and pick the 95th or 99th worst volume, assume a conservative participation rate and see how long does it take you to liquidate a position. You can also choose different scenarios for the participation rate (e.g. 5%, 10%, 15%) and see how these vary.

After figuring the number of days to liquidate your position, you can use this information to scale up your daily VaR measure. Since VaR shows you the potential amount of loss at certain confidence level, scaling it up by the square root of time will show how much loss you are going to incur.

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