Stress testing / Liquidity and funding risk [32]

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Bullet points include: We can differentiate between Market liquidity risk (also called asset liquidity risk): impact of current and anticipated future trading costs Funding liquidity risk: risk that an institution will have difficulty financing its asset position or in liquidating assets to meet its obligations Can model impact of markets (i) ceasing to operate versus (ii) just facing high(ish) bid offer spreads Former generally much more dramatic than latter – akin to a temporarily ‘infinite’ bid-offer spread

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