Under the standardized approach, the liquidity horizons of risk factors are incorporated into market risk capital calculations through the risk weights determined by the Basel Committee.

When a bank uses the historical simulation approach, the impact of 1-day changes in risk factors are scaled to the liquidity horizon for the risk factor by multiplying by the square root of time.

The standardized approach incorporates the diversification benefits between risk factors with different liquidity horizons through the risk weights set by the Basel Committee.

The historical simulation approach estimates a liquidity-adjusted ES by assuming a 10-day liquidity horizon for all risk factors, since their behavior will most likely be highly correlated during volatile market conditions