The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

StatPro Discovers Solution to the Liquidity Risk Paradox

Share article

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.

Related content


Recorded Webinar: How to leverage the LIBOR transition to improve your data management game

The transition away from LIBOR (London Interbank Offered Rate) is well underway, but there remains considerable ambiguity around how the final stages will be executed – especially with regards to benchmark replacements in markets outside the UK. What are the options, where are the uncertainties and what stage have firms reached in their preparations? The...


FINOS and Goldman Sachs Release Legend Open Source Data Management Platform

In pursuit of data collaboration and standardisation across capital markets, the Fintech Open Source Foundation (FINOS) and Goldman Sachs have released Legend, the bank’s flagship data management and data governance platform. The source code for five of the platform’s modules is available from FINOS. Goldman Sachs contributed its PURE logical modelling language and Alloy platform...


Data Management Summit USA Virtual

Data Management Summit USA Virtual will explore how sell side and buy side financial institutions are navigating the global crisis and adapting their data strategies to manage in today’s new normal environment.


The Global LEI System – A Solution for Entity Data?

The Global LEI System – or GLEIS – has been in development since the middle of last year. Development has been patchy at times, but much has been done, leaving fewer outstanding issues, but also raising new questions. What’s emerging is a structure for the GLEIS going forward, complete with a mechanism for registering and...