Liquidity Risk

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

See also: Statistics and Machine Learning Toolbox, Econometrics Toolbox, MATLAB, asset liability modeling, market risk, credit risk, operational risk, risk management, Monte Carlo simulation, concentration risk, superannuation