Practical measurements have shown it does Not lend itself to approximations .

1 - Liquidity Risk in terms of days required to unwind the position

The first framework matches closely what can be observed in practice and is largely based on the ageing process that takes place over time.

Under this framework, Liquidity risk measures the cost associated with the unwinding of the position over a number of days.

When this approach is followed, the position's amount is broken down into the number of days necessary to liquidate the positions.

This approach is based on position ageing and takes into account the over-night cost-of-carrying the position's outstanding amount.

The overnight rate used to carry the position is taken automatically from the Exposure's Cash-Account Funding Curve definition. The overnight funding rate can also be defined manually, if needed.

Risksvr™ is designed to incorporate  liquidity risk measurement at each step of the risk computation.

The liquidity risk factor can be defined at the trade level, at a Tag hierarchy level  or at an overall global Liquidity Risk level..

For example, you could assign a five (5) day liquidity risk to a large Equity Option position, a seven (7) day liquidity risk for trades that belong to the "Emerging Market" tag and an overall risk of, say, three (3) days for all the other positions in your portfolio.


Liquidity risk as position unwinding can be defined either in days or in percent.