Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade. In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ... Look up Market in Wiktionary, the free dictionary. ...

Manifestation of liquidity risk is very different from a drop of price to zero. In case of a drop of an asset's price to zero, the market is saying that the asset is worthless. However, if one party cannot find another party interested in trading the asset, this can potentially be only a problem of the market participants with finding each other. This is why liquidity risk is usually found higher in emerging markets or low-volume markets. Chehel Sotouns Wall painting, that dates back to the Safavid era, depicts a Chaharshanbe Suri celebration. ... Chehel Sotouns Wall painting, that dates back to the Safavid era, depicts a Chaharshanbe Suri celebration. ... Look up Market in Wiktionary, the free dictionary. ...

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity. In essence financial risk is any risk associated with money. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... A credit rating assesses the credit worthiness of an individual, corporation, or even a country. ...

Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make its payment. Should it be unable to do so, it too will default. Here, liquidity risk is compounding credit risk. A payment is the act of transfering wealth into another person or company. ... A payment is the act of transfering wealth into another person or company. ... Lets talk about risk control strategies, anyone with more information and willing to share, please do so. ... Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ...

A position can be hedged against market risk but still entail liquidity risk. This is true in the above credit risk example—the two payments are offsetting, so they entail credit risk but not market risk. Another example is the 1993 Metallgesellschaft debacle. Futures were used to hedge an OTC obligation. It is debatable whether the hedge was effective from a market risk standpoint, but it was the liquidity crisis caused by staggering margin calls on the futures that forced Metallgesellschaft to unwind the positions. Lets talk about risk control strategies, anyone with more information and willing to share, please do so. ... Metallgesellschaft AG was a German company. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Market risk is the risk that the value of an investment will decrease due to moves in market factors. ...

Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk do not exist. Certain techniques of asset-liability management can be applied to assessing liquidity risk. A simple test for liquidity risk is to look at future net cash flows on a day-by-day basis. Any day that has a sizeable negative net cash flow is of concern. Such an analysis can be supplemented with stress testing. Look at net cash flows on a day-to-day basis assuming that an important counterparty defaults. In banking, Asset Liability Management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. ... In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, usually tied to a specific project. ... This article does not cite any references or sources. ...

Analyses such as these cannot easily take into account contingent cash flows, such as cash flows from derivatives or mortgage-backed securities. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. A general approach using scenario analysis might entail the following high-level steps: In mathematics, the derivative of a function is one of the two central concepts of calculus. ... A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. ... Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios). ... Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios). ...

• Construct multiple scenarios for market movements and defaults over a given period of time
• Assess day-to-day cash flows under each scenario.

Because balance sheets differ so significantly from one organization to the next, there is little standardization in how such analyses are implemented. This article needs additional references or sources for verification. ...

Regulators are primarily concerned about systemic implications of liquidity risk.

See also

• Credit risk
• Currency risk
• Legal risk
• Market risk
• Operational risk
• Risk modeling

• Short information about Liquidity risk

Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ... Currency risk is a form of risk that arises from the change in price of one currency against another. ... Legal and regulatory risk: Sometimes governments change the law in a way that adversely affects a banks position. ... Market risk is the risk that the value of an investment will decrease due to moves in market factors. ... According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. ... Risk modeling refers to the use of formal econometric techniques to determine the aggregate risk in a financial portfolio. ...

References

• Crockford, Neil (1986). An Introduction to Risk Management (2nd ed.). Woodhead-Faulkner. 0-85941-332-2. 
• van Deventer, Donald R., Kenji Imai and Mark Mesler (2004). Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management. John Wiley. ISBN-13: 978-0470821268.