Book Review: Market Liquidity Risk



Liquidity is ephemeral, and difficult to define.  The first real article at my blog was about liquidity, and the three things that liquidity can mean, notably: the ability to:

  • Enter into large or exit from commitments to risk assets cheaply (cost)
  • Borrow at tight credit spreads compared to the safest borrowers
  • Make large adjustments to their asset allocations rapidly (speed)

Most of these phenomena can be observed without complex models.  Ask yourself:

  • Is credit growing rapidly?
  • Are the exchanges moving turning over stocks more rapidly?
  • Are credit spreads tight?
  • Have credit terms and conditions deteriorated?
  • Do lenders care more about volume of lending than quality of lending?

My bias is that I think most of the academic mathematical models of liquidity risk are overly technical, and tend to obscure liquidity conditions rather than reveal what is going on.  You may disagree with that view.

But unless you disagree with that view and you like math, this book will not be worth a lot to you.  Yes, there are qualitative sections, and they are good.  For example, the beginning of chapter 2 is very good at illustrating the paradoxical nature of liquidity.  Chapters 1-3 would have made a very good qualitative monograph on liquidity — but it would be so small that you couldn’t charge $80+ for it.

Chapters 4-6 will only be useful to the mathematically inclined.  I’m dubious that they even be useful then, because much of it is calculus, which does not do well with discontinuous events such as market panics.  (You would have thought that the quants on Wall Street would have learned by now, but no…)  Even if the models did work, there are simpler ways to see the same things, as I pointed out above.

As such, I really can’t recommend the book, and at $80+ the price is a lot more expensive than the free Monograph from the CFA Institute “The New Economics of Liquidity and Financial Frictions.” [PDF]  Read that, not this, and save liquidity.


The book could have used a better editor.  Too many typos in the introductory chapters.

Summary / Who Would Benefit from this Book

If you are a math nerd, and want to pay a lot of money to buy a book that I think will at least partially mislead you on liquidity risk, then this is the book for you.  If you want to buy it, you can buy it here: Market Liquidity Risk.

Full disclosure: I received a copy from a friendly PR flack.

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