Liquidity Risk - Relevance to Actuaries [18]

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Bullet points include: Brunnermeier (2008) and others characterise liquidity into two types. Funding liquidity – ease with which expert investors and arbitrageurs can obtain funding by pledging assets as collateral. Influenced by market structure, transparency of valuation etc. Market liquidity (aka asset liquidity) – ease with which it is possible to raise money by selling  assets. Influenced by bid-offer spreads, market depth, market resilience. Interaction can cause liquidity to evaporate very rapidly, e.g. via: Loss spirals – lenders may require borrowers to put some of their own money at stake, and (mark-to-market) losses will deplete the available capital. Margin spirals – may stop other market participants from exploiting the ‘attractive’ prices at which positions are then being liquidated

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