Three ways to model liquidity risk

Deriving synthetic bid/ask spreads offers a new approach to a thorny problem


Liquidity risk has got a fair amount of attention recently, with much discussion of how it is defined and thought about, but little revealed about how it can be effectively measured. Portfolio and risk managers describe officially sanctioned procedures for priority treatment of assets during liquidity events, such as rankings based on unrealised profit or on estimated time to liquidity. But most liquidity risk measurements discussed suffer from a serious flaw.

Liquidity paradox


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