Liquidity Risk - Types of Liquidity Risk

Types of Liquidity Risk

Market liquidity – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk. This can be accounted for by:

  • Widening bid/offer spread
  • Making explicit liquidity reserves
  • Lengthening holding period for VaR calculations

Funding liquidity – Risk that liabilities:

  • Cannot be met when they fall due
  • Can only be met at an uneconomic price
  • Can be name-specific or systemic

Read more about this topic:  Liquidity Risk

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