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Risk distortions created by liquidity glut: Watchpoint for structured note backers

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  • Wise, Richard

Abstract

This paper examines the risk implications of persistently low volatility across capital markets. While a combination of globalised market efficiencies and an abundance of excess liquidity have worked to suppress volatility in recent years, investors' requirement for yield in this low volatility environment is resulting in an overhang of residual and correlated risk in the marginal part of risk distribution. The paper concludes that as existing metrics continue to be focused on localised, volatility-based measures of riskiness, this overhang remains dangerously opaque.

Suggested Citation

  • Wise, Richard, 2007. "Risk distortions created by liquidity glut: Watchpoint for structured note backers," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 1(1), pages 12-16, December.
    • Handle: RePEc:aza:rmfi00:y:2007:v:1:i:1:p:12-16
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    More about this item

    Keywords

    volatility; monetary policy; liquidity; systemic risk; derivatives;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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