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On the White Board - March 2009
Mar 15, 2009
Something to Talk About
Rolling into testing now, and slated for our upcoming release of our RiskServer analytics is our first offering in the realm of liquidity risk. We will begin by introducing the notion of liquidity horizon to each position. The liquidity horizon represents the time it would take for the holder of such a position to liquidate it entirely in such a way as to not materially affect the market price. For equity positions, we will provide a service to estimate the liquidity horizon by examing recent trading volume. Within the analytics, we will perform a Liquidation P&L simulation, assuming each position is held for its particular liquidity horizon. All risk statistics that we provide today will thus have a Liquidation counterpart computed off of these new simulations. We anticipate that this first set of functionality, while not a complete liquidity solution, will foster much more concrete discussions on what else we might provide as monitors of liquidity risk. From here, possible future developments are numerous. One track is to simply expand coverage, while sticking to the "market impact" view of liquidity that drives what we have done already. This would involve providing guidance on liquidity horizons for other asset types, relying on volume and other aggregate information from sources such as futures and options exchanges, the TRACE data service on bonds, the Federal Reserve's reports on repo activity, the DTCC reports on Credit Default Swap exposures, and so on. A second track is to look for network and contagion effects through flow data and disclosed large institutional holdings. While more difficult, this track has the potential to provide more timely signals, rather than just a characterization of the recent average behavior of a given market. We look forward to discussions on our new functionality and to providing much more in the future.