Market Liquidity Risk - An Overview

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents in EconStor mayThis 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.

Stock market liquidity and firm performance

“…In perfect capital markets populated by rational investors, a firm's value was a function of the firm's investment opportunities and was independent of the firm's payout policy. Stange and Kaserer (2009) stated that market liquidity facilitates trading of an asset. Its risk was the potential loss, because a security can only be traded at high or prohibitive costs.…”

Spread and Liquidity Issues: A markets comparison

“…From the discussion thus far, we can further define market liquidity as costs associated with trading an asset relative to its mid-price. Stange and Kaserer (2009) defined possible degrees of liquidity of an asset as "fully liquid", "continuously tradable", "disruptively tradable", and "illiquid".…”

Measuring Market Liquidity Risk - Which Model Works Best?

“…We group 3 Liquidity risk models explicitly treating delay are still under development, cp. discussion in Stange and Kaserer (2008b). 4 For a more detailed discussion please refer to Stange and Kaserer (2008b).…”

“…discussion in Stange and Kaserer (2008b). 4 For a more detailed discussion please refer to Stange and Kaserer (2008b). the chosen models by the type of data required for their estimation: bid-ask-spread models, transaction or volume data models, and models requiring limit order book data.…”