Liquidity Risk Management: A Case for Broader Data & Model Integration

Friday, November 4, 2022 | By Patrick Braun, Director, Buy-Side Product Management, and Rafael Mendoza-Arriaga, Director, Financial Risk Quantitative Research

Liquidity Risk Management: A Case for Broader Data & Model Integration

In the wake of the 2008 global financial crisis, researchers and institutional investors became more interested in liquidity risk modeling at large. As market and funding liquidity assessment have now become key requirements for major regulatory bodies, fund managers and risk specialists have sought to integrate liquidity risk analysis into their daily operations.

The term “liquidity” is used broadly to refer to central bank liquidity, funding liquidity and market liquidity. While the interplay between the three components shall be considered, investment practitioners’ needs are focused on monitoring funding liquidity ratios at fund or scheme levels, market liquidity indicators and the associated risks.

In today’s financial market, the investment process stakeholders all agree on the growing importance of market liquidity monitoring and modeling. Based on their different roles, they often hold diverging views on associated risk/return benefits though. For example, long-term investors like pension funds and insurance firms may prefer illiquid positions, as these carry desirable return premia. On the other hand, shorter-term investors like long-short quantitative fund managers may see an illiquid position as a dead end to their high turnover investment strategy, thus favoring most liquid assets.

To learn more about the market liquidity risk monitoring and modeling needs at position, portfolio or liquidation strategy level, download our "Liquidity Risk Management - A Case for Broader Data/Model Integration" whitepaper.

Contact us to learn how you can use SS&C Algorithmics’ risk analytics solutions to incorporate liquidity risk considerations into the broader risk management process of your investment teams.

APAC, Asset Management, EMEA, Fund Administration, Insurance, Research, Analytics, and Consulting, Retirement, Risk Management

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