Risk Minds

Risk Minds

Liquidity Risk: Who, What, When, Where?

The liquidity risk premium continues to pose challenges to financial modellers and practitioners, and liquidity risk is one of the more difficult financial metrics to model and manage.

The liquidity risk premium is the compensation required by providers of liquidity, and is likely to vary across markets and over time. It also plays a role in collateralized borrowing terms – lenders may need to liquidate collateral, and they are likely to demand larger collateral buffers or higher borrowing rates if they accept illiquid assets as security.