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CMRA Commentary

CMRA Articles and Commentary

Posts tagged risk management
Asset Liquidity Risk: Piecing Together the Puzzle

Liquidity risk is a key risk and has been a recent focal point for regulators, with increasing transparency and attention demanded by SEC Rule 22e-4 for mutual funds and by Basel III's liquidity requirements for banks. Meanwhile, market participants have a sense that asset liquidity may be deteriorating, but there is little agreement even on the definition of liquidity risk or on how exactly to measure it. It is clear, however, that asset liquidity risk is multifaceted and managing it is both an art and a science.

We explore some of the questions surrounding asset liquidity risk in our whitepaper.

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The Great (Disappearing) Recession: Adding Historical Data Desensitizes the Shock

Lehman Brothers filed for bankruptcy on September 15, 2008 and the subsequent Great Recession reached its peak in 2009. Because these were the biggest and most stressful financial events of the last 80 years, historical data from 2008 and 2009 form the basis for much of today’s risk stress testing. However, as the intervening years push us further away from 2008 and 2009, the Great Recession’s impact on risk metrics can start to recede.

Most financial services companies use stress scenarios that are based on historical data. For example, the 99th percentile adverse move over a 10-day period is a common cut-off for the development of stress scenarios. Notably, such a stress scenario is by definition no more severe than the 99th percentile.

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