Stress testing / Liquidity and funding risk [35]

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Bullet points include: Hard to measure directly, and highly correlated across instruments Coordination effects: traders may concentrate on one particular instrument, in which case it becomes more liquid Usually a ‘tail’ risk: infrequent but high impact when it happens Can look at proxies, e.g. a security’s current bid-ask spread, or its market cap, on versus off the run status Or stock borrowing costs, or market-wide proxies, e.g. OIS – Libor spreads See also, e.g. Houweling, Mentink, Vorst: “Comparing possible proxies of corporate bond liquidity” Equity liquidity potentially easier to measure (centralised exchanges, price / deal posting)

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