Analyze and manage risk associated with liquidity constraints
Liquidity risk is the potential for investment loss when an asset or financial instrument cannot be traded within a given timeframe.
This kind of risk can be classified into two types:
- Funding liquidity risk – the loss incurred when a financial institution is unable to settle its obligations with immediacy
- Market liquidity risk – the expected loss incurred when trading an asset for cash
Effective techniques for managing liquidity risk include:
- Building customized asset-liability management models
- Designing and pricing derivatives to hedge risk
- Performing market impact studies
- Implementing Basel II/III compliant risk systems
- Performing Monte Carlo scenario analysis to assess risk exposure from cash flow variations
For more information, see Statistic Toolbox™ and Econometrics Toolbox™.
Examples and How To
See also: asset liability modeling, market risk, credit risk, operational risk, risk management, Monte Carlo simulation