Introduction to 'Managing Illiquid Assets'

Savita Verma and Michael Schouten

This article was first published as a chapter in Managing Illiquid Assets: Perspectives and Challenges, by Risk Books.

Illiquid assets are assets that cannot be readily converted into cash, in contrast with liquid assets, which either are in the form of cash or can be easily traded for cash. An illiquid asset is not readily saleable, due to uncertainty about its value or the lack of a market in which it may be regularly traded. Derivative products such as the credit default swaps (CDSs) and mortgage-backed securities (MBSs) that played a key role in the 2008–9 financial crisis are examples of illiquid assets, since their value was not readily determinable despite being secured by real property.¹¹This is true especially of the derivative products, which had high-risk, subprime mortgages (mortgage loans to people who would find it difficult (if not impossible) to maintain the repayment schedule) as the underlying assets. Other examples of illiquid assets include large blocks of a stock and real estate, since these assets trade infrequently and are therefore difficult to value.

In general, assets may start out being liquid. A change in market and trading conditions may, however