Risk & returns
Liquidity risk is the chance that an asset cannot be sold, funded or valued promptly at a reasonable price when needed. It often appears most sharply during stress.
Make it click
A doorway seems adequate until a crowd tries to leave together. The number wanting out and the doorway's real width determine delay and damage.
Now put that into markets
Spreads can widen, depth disappear and funds can gate or suspend dealing. Financing liquidity can force sales even when long-term value seems intact.
Asset liquidity and funding liquidity reinforce each other through collateral and margin. Valuation smoothing can hide risk before transactions occur.
Assess normal and stressed volume, depth, redemption terms, settlement and liabilities. Match illiquid assets with cash-flow needs.
Historic trading activity may not survive a shock, and a listed wrapper does not make every underlying holding liquid.
Takeaway
