Review of Market Liquidity Risk Measurement Models Presented By: Kishore Rathi, EFPM 2 $eminar %uide: &r '

K Pradhan
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Liquidity has been a very elusive topic with very little academic research coverage in Modern Finance. Cohesive definition of this phenomena is far from agreed upon. On the outset liquidity, with a number of dimensions and perspectives, presents a zig saw puzzle of a common anticipation of uncertain worst loss. !his loss is to be incurred while liquidating a large portfolio in want of cash. Financial debacles li"e #lac" Monday $%&'(), *sian Crisis$%&&(), L!CM $%&&'), +ussian #ond Crisis$%&&'), *maranth$,--.), subprime M#/0C1O$,--') and others prompted much needed coverage on this topic. 2nstitutions, +egulators, and 2nvestors ali"e all prefer to have a measure which can be integrated in their day to day decision ma"ing "eeping the financial ris" management in control. 3eeping this in mind liquidity research coverage has been on the 4a+ line of thin"ing. 4a+ oriented thin"ing has prevailed in prominence because of its simplistic interpretation and ease of computation in spite of it being not a coherent measure of ris". !his paper reviews various prevalent empirical and theoretical models to measure mar"et liquidity ris". 5mpirical models use various aspects of #id *s" spread and volume to determine the price impact of liquidation and factor the adverse impact in 4a+ calculation. !he theoretical models tend to minimize the price impact by focusing on optimal e6ecution strategy based on 1emand /upply curve. !hough empirical tractability and parameter estimation of the theoretical models is yet to be accomplished. *ll the models tend to achieve a single measure which can be added to the e6isting ris" measurement framewor". Keywords: Liquidity, Mar"et Liquidity, Liquidity Cost, #id *s" /pread, 7eighted #id *s" /pread, Mar"et 1epth, 8rice 2mpact, Optimal 56ecution /trategy, Optimal 9olding 8eriod, Mar"et +is", 4a+, l4a+. +EL ,lassifi*ation: :%%, :%,, :%;, :<,