Modeling and Managing Liquidity Risk

Much of the current crisis can be traced to models that failed to adequately reflect risk, both in housing costs and complex financial instruments. Even if historical homeprice data had never recorded changes like those realized recently, data from other bubbles, from tulip bulbs on, could have been used. It was not clear that housing was in a bubble, but bubble scenarios should have been in the models. Those model issues need to be, and are being, addressed, but here the focus is on liquidity risk.

Keywords: Enterprise Risk Management