Risk distortions created by liquidity glut: Watchpoint for structured note backers

Richard Wise

Journal of Risk Management in Financial Institutions, 2007, vol. 1, issue 1, 12-16

Abstract: This paper examines the risk implications of persistently low volatility across capital markets. While a combination of globalised market efficiencies and an abundance of excess liquidity have worked to suppress volatility in recent years, investors' requirement for yield in this low volatility environment is resulting in an overhang of residual and correlated risk in the marginal part of risk distribution. The paper concludes that as existing metrics continue to be focused on localised, volatility-based measures of riskiness, this overhang remains dangerously opaque.

Keywords: volatility; monetary policy; liquidity; systemic risk; derivatives (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2007:v:1:i:1:p:12-16

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