RBC Dexia offers liquidity-risk framework for institutional investors

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  • RBC Dexia offers liquidity-risk framework for institutional investors

GLOBAL - Classical Value at Risk (VaR) measures fail to address portfolio risk in difficult market liquidity circumstances, according to a report published by RBC Dexia in partnership with RiskMetrics Group.

The paper, entitled The Value of Liquidity, introduces a new framework for valuing and measuring liquidity that aims to provide insights into the notion of liquidity against the backdrop of the constraints faced by asset managers.

While traditional VaR measures may provide useful indications of portfolio risk in liquid markets, the recent crisis showed they fail to address risk in the presence of less-than-perfect market liquidity or portfolio liquidity constraints, RBC Dexia said.

Although regulators currently call for VaR measures as part of an overall risk-management process, many in the industry want to refine this measure further, it added.

RiskMetrics' Christopher Finger, who co-authored the report, said: "Liquidity risk has been central to most financial crises historically, and yet a clean definition of liquidity risk is elusive.

"In the past, issues such as market depth have been treated in isolation from funding and redemption concerns.

"It is crucial to examine the interaction between these components."

The report brings all these concepts together and defines an approach to value portfolios based on the external liquidity of the portfolio constituents and the internal constraints to which the portfolio owner is subject, RBC Dexia said.


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