High cost of underestimating liquidity risk

13 Aug 2014

Liquidity risk has long been underestimated by investors. The price for this mistake can be large, as was demonstrated in the liquidity crisis during 2007 and 2008.

Increased financial regulation means liquidity risk can get even more skewed, and is likely to be underestimated by those who are not vigilant in critically valuing it.

Combining liquidity data and considering how major structural changes to the market will impact the behaviour of liquidity, we reaffirm that liquidity risk remains the major risk for which investors need to be compensated.
 

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