Types of Liquidity Risk
Market liquidity – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk. This can be accounted for by:
- Widening bid/offer spread
- Making explicit liquidity reserves
- Lengthening holding period for VaR calculations
Funding liquidity – Risk that liabilities:
- Cannot be met when they fall due
- Can only be met at an uneconomic price
- Can be name-specific or systemic
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