About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

StatPro Discovers Solution to the Liquidity Risk Paradox

Subscribe to our newsletter

StatPro Group, a leading provider of portfolio analysis and asset valuation services for the global asset management industry, announces a major breakthrough in its risk measurement research.

StatPro has designed an innovative approach to measuring market liquidity risk that does not rely only on observed bid, ask and volumes. Instead, factors such as market capitalisation, the percentage of ownership of a stock and the size of an issue for a fixed income instrument are taken into account.

Liquidity risk refers to the risk of losing money when you suddenly liquidate one or more positions in your portfolio. The loss comes from selling the positions at a lower price than the one at which those positions are marked-to-market.

“While innovations in the area of market risk have been very active in recent years – for example, introducing the concept of Value at Risk – little exists on liquidity risk. The reason is that while measuring market risk you can create models that are calibrated with market data, you cannot do the same for liquidity risk,” said Dario Cintioli, Global Head of Risk of StatPro.

“In calibrating a liquidity risk model you need access to the bid, ask and volume information. Well, the problem is that this information is only available for liquid issues. Whatever model you invent, you will always lack the basic information to calibrate it for the instruments that present most of your liquidity risk. We call this the ‘liquidity risk paradox’.

StatPro’s software facilitates the selection of the appropriate liquidity risk scenario and the computation of the expected loss for liquidity risk. The view includes a breakdown of the liquidity risk loss across various components.

The user can select one scenario and build a ‘tree’ of criteria for breaking down the liquidity risk contribution at each hierarchy level, down to single asset composition. The risk manager can drill down through every component of liquidity risk, discovering how much is coming and from where, without any previous knowledge of the portfolio. This tool enables the risk manager to ‘X-ray’ the liquidity risk of the portfolio, spotting any challenging situations.

“We have solved the paradox of measuring market liquidity risk when trading volume and market price information is not available. As with all our risk analyses, liquidity risk can be run at single asset level, portfolio level, portfolio versus benchmark and as an aggregation of several portfolios. The latter option is critical to liquidity risk, as the percentage of ownership of one stock can be negligible when measured by portfolio, but can become relevant at ‘firm’ level,” concludes Cintioli.

Subscribe to our newsletter

Related content

WEBINAR

Recorded Webinar: Potential and pitfalls of large language models and generative AI apps

Large language models (LLMs) and Generative AI applications are a hot topic in financial services, with vendors offering solutions, financial institutions adopting the technologies, and sceptics questioning their outcomes. That said, they are here to stay, and it may be that early adopters of Generative AI apps could gain not only operational benefits, but also...

BLOG

CUSIP Global Services Partners BeZero to Create Unique Identifiers for Carbon Credits

CUSIP Global Services, a provider of securities identification across capital markets, has partnered ratings agency BeZero Carbon to create identifiers for carbon credits. Unique CUSIP identifiers will be assigned to carbon credit projects listed on the major registries across the voluntary carbon market (VCM). This will make carbon credit trading more efficient as the market...

EVENT

RegTech Summit London

Now in its 8th year, the RegTech Summit in London will bring together the RegTech ecosystem to explore how the European capital markets financial industry can leverage technology to drive innovation, cut costs and support regulatory change.

GUIDE

Regulatory Data Handbook 2023 – Eleventh Edition

Welcome to the eleventh edition of A-Team Group’s Regulatory Data Handbook, a popular publication that covers new regulations in capital markets, tracks regulatory change, and provides advice on the data, data management and implementation requirements of more than 30 regulations across UK, European, US and Asia-Pacific capital markets. This edition of the handbook includes new...