Upon the request of the speaker, no recording is available for this lecture.
The Department of Finance and Risk Engineering welcomes Naresh Malhotra, Director/Supervisor at Societe Generale to the BQE Lecture Series.
Market Liquidity Risk in Financial Markets
An optimistic view of market liquidity, i.e. the assumption that financial contracts can be settled at current market prices without any friction or transaction costs, may pose serious threats to the financial stability as was amply evidenced during the 2008 financial crisis. Today’s presentation aims to explore various aspects of market liquidity risk and provides a snapshot of methods to incorporate market liquidity risk into existing risk tools such as Value at Risk (VaR). The standard VaR measures, do not capture the risk of market liquidity appropriately. To some extent, this is being addressed in the impending market risk capital regime through the Fundamental Review of the Trading Book (FRTB) initiative, by introducing Expected Shortfall (ES) risk measure and adjusting ES for the effect of market liquidity. In this presentation, we first scrutinize normal liquidity risk, corresponding to the liquidation cost during normal periods, then examine the impact of price elasticity during crisis periods and results in violent price adjustments. In the first case, we assess liquidity risk in markets by using bid-offer spreads and by analyzing the negative impact on price distortions resulting from the liquidation of a sizeable portfolio. Both of these methods must be combined to analyze the wholesome impact of market liquidity on risk measures.
Naresh is a director at Societe Generale (SG) focused on capital markets and investment management activities, and an Adjunct Professor in Finance and Risk Engineering program at NYU. Prior to joining SG, Naresh served as US lead director of traded risk at KPMG. Previously, Naresh worked at Diamond Notch Asset Management, a hedge fund, as a portfolio manager and head of European Credit Trading. In prior roles, he served as head of credit exotics at Commerzbank (London), and as a senior credit derivatives trader at UBS and Merrill Lynch in New York. Naresh has a Ph.D. in Engineering from the University of Illinois (Urbana-Champaign, IL), and a BS in Aerospace Engineering from IIT-Kanpur (India). The academic preparation was followed by a research faculty position in Engineering & Applied Math at Caltech (Pasadena, CA).