Liquidity Adjustment Of The Investment Strategy

There are many risks in financial market, such as price volatility risk, credit risk, operational risk, model risk and liquidity risk. Since the liquidity crunch of the Long Term Capital Management, investor begin to focus liquidity and liquidity risk .This paper consider the problem of liquidity risk, especially the trading strategy based on liquidity, mainly on the assumption that block trades have impact on the asset or portfolio price, previous studies suppose that asset price follows an arithmetic Brownian motion with no drift, this paper argues that investors are more concerned about the return of asset or portfolio, so we suppose the return of assets obey the Brownian motion with drift u, We have established price impact coefficient is a constant, random variable, stochastic process model of liquidity shocks, researched the choice of the investment strategy. We conducted an empirical study of the liquidity of stock index futures .