Liquidity risk measures how easy or difficult it is to sell a particular stock or share.
A highly liquid stock might be offloaded in a time of crisis at a minimal loss because there is a ready market for it.
However disposing of an illiquid investment is often problematic, particularly when the volumes involved are large.
Instead, factors such as market capitalisation, the percentage of ownership of a stock and the size of an issue for a fixed income instrument are taken into account.
“The risk manager can then drill down through every component of liquidity risk, discovering how much is coming and from where, without any previous knowledge of the portfolio,” StatPro said in a release to the stock exchange this morning.
“This tool enables the risk manager to x-ray the liquidity risk of the portfolio, spotting any challenging situations.”
Chief executive Justin Wheatley said says there has been a great deal of innovation in the area of risk, in particular mathematical modelling of the concept of “value at risk”.
However very little research has gone into the liquidity risk, he added.
“The reason is that while measuring market risk you can create models that are calibrated with market data, you cannot do the same for liquidity risk,” Wheatley explained.
“The approach we have developed is a major achievement in measuring market liquidity risk when trading volume and market price information is not available and we are thrilled to offer this enhanced solution to our clients.
“We continue to invest in product development and believe this adds significant value to our offering."
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