The Liquidity-at-Risk (short: LaR) is a measure of the liquidity risk exposure of a financial portfolio.

It may be defined as the net liquidity drain which can occur in the portfolio in a given risk scenario. If the Liquidity at Risk is greater than the portfolio's current liquidity position then the portfolio may face a liquidity shortfall.

Liquidity at Risk is different from other measures of risk based on total loss, as it is based on an estimate of cash losses, or liquidity outflows, as opposed to total loss.

Definition

The Liquidity-at-Risk of a financial portfolio associated with a stress scenario is the net liquidity outflow resulting from this stress scenario:[1]

Liquidity at Risk = Maturing Liabilities + Net Scheduled Outflows + Net Outflow of Variation Margin + Credit-Contingent Cash Outflows

The liquidity shortfall in a stress scenario is thus given by the difference between the Liquidity-at-Risk associated with the stress scenario and the amount of liquid assets available at the point where the scenario occurs.

The concept of Liquidity at Risk is used in stress testing. It is a conditional measure, which depends on the stress scenario considered.

By analogy with Value-at-Risk one may also define a statistical notion of Liquidity at Risk, at a given confidence level (e.g. 95%), which may be defined as the highest Liquidity at Risk that may occur across all scenarios considered under a probabilistic model, with probability higher than the confidence level.[2]

This statistical notion of Liquidity at Risk is subject to model risk as it will depend on the probability distribution over scenarios.

Relation with other risk measures

Liquidity at Risk is different from other measures of risk based on total loss, such as Value at Risk, as it is based on an estimate of cash losses, or liquidity outflows, as opposed to total loss.

See also

References

  1. ↑ Cont, Rama; Kotlicki, Artur; Valderrama, Laura (2020). "Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity". Journal of Banking and Finance. 118. doi:10.1016/j.jbankfin.2020.105871. hdl:11250/2652653.
  2. ↑ Conzen, Sander (6 September 2009). Liquidity at Risk (LaR) und LiquidityValue at Risk (LVaR): Zwei neue Ansätze für das Liquiditätsmanagement (in German) (Frankfurt School of Finance & Management ed.). Hamburg, Germany: Diplomica. ISBN 978-3-8366-3500-4. Retrieved 12 January 2016.
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