 Liquidity RiskChapter 7 in The Economic Foundations of Risk Management:Theory, Practice, and Applications, 2017, pp 59-68 from World Scientific Publishing Co. Pte. Ltd. Abstract: Liquidity risk occurs when we relax the competitive market assumption and there is a quantity impact on the price from trading an asset, i.e. the more units of an asset one buys, the larger the purchase price per share paid, and the more units of an asset one sells, the smaller the selling price per share received. There are two cases to be studied: a temporary and a permanent quantity impact on the price. A temporary impact on the price occurs when the quantity impact only lasts for an instant, and disappears after the trade is executed. When temporary, the quantity impact on the price is analogous to a transaction cost. As such, the trade has no effect on the future evolution of the asset price process. A permanent impact on the price occurs when the quantity impact lasts for a finite time interval and affects the future evolution of the asset price process. This chapter discusses both of these possibilities. Keywords: Risk Management; Derivatives; Value-at-Risk; Funding Risk; Financial Engineering (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789813147522_0007 Ordering information: This item can be ordered from Access Statistics for this chapter More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd. |
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