Liquidity Commonality and Risk Management

Examining the Commonality in Liquidity and Volatility Risk

We estimate latent factor models of liquidity and volatility. Common liquidity and volatility factors are extracted using multiple liquidity and volatility measures. Additionally, latent factors are extracted by aggregating across both liquidity and volatility resulting in what we will call the common “uncertainty” factors. We find that volatility and the common uncertainty risk are significant...

Liquidity and Risk Management

This paper provides a model of the interaction between risk-management practices and market liquidity. Our main finding is that a feedback effect can arise. Tighter risk management leads to market illiquidity, and this illiquidity further tightens risk management. Risk management plays a central role in institutional investors’ allocation of capital to trading. For instance, a risk manager may ...

A Theory of Demand Driven Liquidity Commonality

Liquidity and volatility commonality in the Canadian Stock Market

This paper studies liquidity and volatility commonality in the Canadian stock market. We show that five various liquidity measures display strong evidence of commonality at both market-wide and industry specific levels. Our findings extend the results of previous studies in liquidity commonality, and show that even after controlling for individual determinants of liquidity such as price, volume...

Risk Management with Options and Futures under Liquidity Risk

Managing price risk with futures contracts creates liquidity risk through marking to market. Liquidity risk matters in an imperfect capital market where interim losses on a futures position have to be financed at a borrowing rate that is higher than the risk-free rate. However, the impact of liquidity risk can be mitigated using options on futures. This paper analyzes the optimal risk managemen...