Response to the following problem:
Suppose that a trader has bought some illiquid shares. In particular, the trader has 100 shares of A, which is bid $50 and offer $60, and 200 shares of B, which is bid $25 offer $35. What are the proportional bid-offer spreads? What is the impact of the high bid-offer spreads on the amount it would cost the trader to unwind the portfolio?
If the bid-offer spreads are normally distributed with mean $10 and standard deviation $3, what is the 99% worst-case cost of unwinding in the future as a percentage of the value of the portfolio.