Stress testing / Liquidity and funding risk [36]

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Bullet points include: For portfolio optimisation exercises we might adjust upwards volatilities of exposures that are judged to be illiquid Proposed by Barcap quants more than a decade ago and regularly used by actuaries for property (at least it was > 15 years ago!) But by how much? Or model behaviour of bid-ask spreads directly, but fat-tailed? For pricing purposes a lot depends on view about whether there is a liquidity premium (or illiquidity premium) and, if there is, what is its magnitude Contentious, as difficult to measure independently of other factors

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