Liquidity drought The chaos caused by a shortage of market liquidity has rarely kept buy-side risk managers awake at night in the same way that traditional market and credit risk has. But after the fallout from the recent US sub-prime crisis led to some
Managing risk has always been, and is likely to remain, a top priority for any institution actively trading in the financial markets. While risk management has historically focused on market and credit risk, liquidity risk has recently edged its way into the spotlight and demanded the buy side's attention. Simply defined, liquidity risk is the danger that market liquidity will diminish to the extent that a firm cannot sell a security for the price at which it has been valued.
Such a situation is
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