Illiquidity Risk of Truly Illiquid Assets
Thought Leadership Webinar: It is a very common perception that investors dislike being constrained by liquidity of their investments at their investment horizons. Several years ago, we presented an approach based on a simulation of liquidity constrained optimizations as another endogenous approach to liquidity risk estimation. In this work, we present an exogenous, transaction frequency based approach, that is economically synonymous with our prior work, but empirically more tractable, granular, and transparent.
Presented By:
Emilian Belev
Head, ERM Analytics
Northfield Information Services, Inc.
Date:
August 14, 2019
Time:
10:00 - 11:00 a.m. EDT
2:00 - 3:00 p.m. GMT
Session Length:
60 minutes
It is a very common perception that investors dislike being constrained by liquidity of their investments at their investment horizons. There has been a notable amount of academic and practitioner research work to try and capture the disutility of illiquidity and its implication to risk and return. Most of those studies have been done from the perspective of endogenous variables that measure this disutility – expected return premium for illiquidity or inferred from bid-ask spreads.
Several years ago, we presented an approach based on a simulation of liquidity constrained optimizations as another endogenous approach to liquidity risk estimation. In this work, we present an exogenous, transaction frequency based approach, that is economically synonymous with our prior work, but empirically more tractable, granular, and transparent. We will use examples form private equity and commercial real estate to illustrate the new methodology. One of the implications of this work is an explicit way to measure the expected cost of risk for asset types that don’t have well defined data for bid-ask spreads.
| About Our Experts |
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Emilian Belev has led the research and development of Northfield Information Services, Inc.'s Enterprise Risk Analytics for about two decades. He is responsible for an integrated framework of multi-asset class analysis. The range of modelled assets under his responsibility includes equity, fixed income, currency, interest rate, and credit derivatives, structured products, directly owned real estate, private equity, and infrastructure. He has introduced innovative methodologies in the areas of convertible bond analytics, pricing path dependency, credit risk analysis, and optimal investing in infrastructure, commercial real estate, and private equity. Emilian has presented on some of these topics at industry events internationally and published research in peer reviewed journals and book chapters.
Prior to joining Northfield, Emilian was with State Street Global Advisors. He is an actively involved CFA charter holder, a recipient of the Certificate in Advanced Risk and Portfolio Management, and a member of the PRMIA expert advisory group for Market Risk.
Emilian is a winner of the 2013 Professional Risk Management International Association Award “New Frontiers in Risk Management”, and recipient of the 2015 American Real Estate Society Award for Best Practitioner Research.
He enjoys part-time teaching of finance graduate students and industry professionals on topics of risk management, in addition to his full time industry involvement. His research passion is the connection between valuation and risk for private assets.
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