NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity and Risk Management

Nicolae B. Garleanu, Lasse H. Pedersen

NBER Working Paper No. 12887
Issued in February 2007
NBER Program(s):   AP

This paper provides a model of the interaction between risk-management practices and market liquidity. On one hand, tighter risk management reduces the maximum position an institution can take, thus the amount of liquidity it can offer to the market. On the other hand, risk managers can take into account that lower liquidity amplifies the effective risk of a position by lengthening the time it takes to sell it. The main result of the paper is that a feedback effect can arise: tighter risk management reduces liquidity, which in turn leads to tighter risk management, etc. This can help explain sudden drops in liquidity and, since liquidity is priced, in prices in connection with increased volatility or decreased risk-bearing capacity.

download in pdf format
   (157 K)

email paper

This paper is available as PDF (157 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12887

Published: Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Liquidity and Risk Management," American Economic Review, American Economic Association, vol. 97(2), pages 193-197, May. citation courtesy of

Users who downloaded this paper also downloaded these:
Gatev, Schuermann, and Strahan How Do Banks Manage Liquidity Risk? Evidence from the Equity and Deposit Markets in the Fall of 1998
Brunnermeier and Yogo w14727 A Note on Liquidity Risk Management
Diamond and Rajan w7430 Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Gatev, Schuermann, and Strahan w12234 Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions
Pastor and Stambaugh w8462 Liquidity Risk and Expected Stock Returns
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us