Liquidity and Risk Management
This paper provides a model of the interaction between risk-management practices and market liquidity. On one hand, tighter risk management reduces the maximum position an institution can take, thus the amount of liquidity it can offer to the market. On the other hand, risk managers can take into account that lower liquidity amplifies the effective risk of a position by lengthening the time it takes to sell it. The main result of the paper is that a feedback effect can arise: tighter risk management reduces liquidity, which in turn leads to tighter risk management, etc. This can help explain sudden drops in liquidity and, since liquidity is priced, in prices in connection with increased volatility or decreased risk-bearing capacity.
|Date of creation:||Feb 2007|
|Date of revision:|
|Publication status:||published as Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Liquidity and Risk Management," American Economic Review, American Economic Association, vol. 97(2), pages 193-197, May.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pierre-Olivier Weill, 2007.
"Leaning Against the Wind,"
Review of Economic Studies,
Oxford University Press, vol. 74(4), pages 1329-1354.
- Darrell Duffie & Nicolae Gârleanu & Lasse Heje Pedersen, 2007.
"Valuation in Over-the-Counter Markets,"
Review of Financial Studies,
Society for Financial Studies, vol. 20(6), pages 1865-1900, November.
- Duffie, Darrell & Garleanu, Nicolae Bogdan & Pedersen, Lasse Heje, 2006. "Valuation in Over-the-Counter Markets," CEPR Discussion Papers 5491, C.E.P.R. Discussion Papers.
- Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2006. "Valuation in Over-the-Counter Markets," NBER Working Papers 12020, National Bureau of Economic Research, Inc.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007.
"Market Liquidity and Funding Liquidity,"
NBER Working Papers
12939, National Bureau of Economic Research, Inc.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
- Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007. "Market Liquidity and Funding Liquidity," CEPR Discussion Papers 6179, C.E.P.R. Discussion Papers.
- Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004.
NBER Working Papers
10816, National Bureau of Economic Research, Inc.
- Mitchel Y. Abolafia (ed.), 2005. "Markets," Books, Edward Elgar, number 2788, December.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12887. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.