Liquidity Risk¶
One-line definition¶
The risk that a position can't be traded near its marked price, especially under stress — distinct from market risk (the price itself moving).
Why PMs care¶
A portfolio can pass every VaR/duration/tracking-error check and still blow up if it can't actually exit positions during a redemption or margin call without moving the market against itself.
Why this isn't implemented in src/pm¶
Realistic liquidity/market-impact modeling (cost as a nonlinear function
of trade size relative to average daily volume, bid-ask spread regime
shifts under stress) needs market microstructure data this repo doesn't
have — transaction_cost's flat-bps model is a stand-in, not a liquidity
model. This page is the conceptual placeholder.
Common mistakes¶
- treating a position's liquidity as constant across calm and stressed markets — spreads widen and depth disappears exactly when you need to trade
- sizing positions purely on volatility/duration limits without a liquidity overlay