Modelling and Managing Liquidity Risk

The market turmoil that began in mid-2007 re-emphasised the importance of liquidity to the functioning of financial markets and the banking sector. In advance of the turmoil, asset markets were buoyant and funding was readily available at low cost. The reversal in market conditions illustrated how quickly liquidity can evaporate and that illiquidity can last for an extended period of time. Financial regulators across the globe are urging institutions to address this dimension of financial risk more comprehensively.

Taken as an extract from Liquidity Modelling, this white paper reviews question such as the economic turmoil of recent years, whether illiquidity risk is a risk type of its own, problems surrounding the measurement of illiquidity risk, and comparing liquid risk to other risks.