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Market liquidity risk: an overview

Author

Listed:
  • Stange, Sebastian
  • Kaserer, Christoph

Abstract

Market liquidity is the ease of trading an asset. Its risk is the potential loss, because a security can only be traded at high or prohibitive costs. While the omnipresence and importance of market liquidity is widely acknowledged, it has long remained a more or less elusive concept. Treatment of liquidity risk is still under development. This paper provides an overview on important aspects of market liquidity and its risk. We also survey existing models to integrate market liquidity risk into risk frameworks. We place special emphasis on practical usability and discuss relevant strengths, weaknesses and their implications.

Suggested Citation

  • Stange, Sebastian & Kaserer, Christoph, 2009. "Market liquidity risk: an overview," CEFS Working Paper Series 2009-04, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    • Handle: RePEc:zbw:cefswp:200904
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    File URL: https://www.econstor.eu/bitstream/10419/48415/1/605089116.pdf
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    Citations

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    Cited by:

    1. Kylie-Anne Richards & Gareth W. Peters & William Dunsmuir, 2015. "Heavy-tailed features and dependence in limit order book volume profiles in futures markets," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-56.
    2. Stereńczak, Szymon, 2020. "Stock liquidity premium with stochastic price impact and exogenous trading strategy," International Review of Financial Analysis, Elsevier, vol. 71(C).
    3. Strašek Sebastjan & Bricelj Bor, 2016. "Spread and Liquidity Issues: A markets comparison," Naše gospodarstvo/Our economy, Sciendo, vol. 62(1), pages 3-11, March.

    More about this item

    Keywords

    asset liquidity; liquidity cost; price impact; Xetra liquidity measure (XLM); risk measurement; Value-at-Risk; market liquidity risk; overview;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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