Quant ideas: Liquidity in commodity risk management

Liquidity plays a vastly underappreciated role in commodity markets

Liquidity in commodity risk management

Liquidity plays a vastly underappreciated role in commodity markets. Often, a lack of liquidity is treated as an analytical inconvenience to be patched up, so that the standard analytical and valuation tools can be still used. This practice arises from the standard procedures in financial markets, where the price paid for simplification is typically not a large one, unless we find ourselves in a crisis situation when liquidity simply disappears. The traumatic experience of the credit crisis repr