A methodology to measure and monitor liquidity risk in foreign reserves portfolios

Andrés Cabrales, Cristiam Rincón and Diana Fernández

Due to a range of factors, liquidity in the financial markets has changed over the last few years. Central banks, who set liquidity as one of the main objectives when investing their foreign reserves, have been disconcerted by this, and for some of them monitoring liquidity risk has become a priority. This chapter proposes a simple methodology that allows central banks to measure liquidity in the areas that matter the most: time needed to liquidate and the cost of liquidation. The results of such a methodology are valuable as they are intuitive and measured in units that are helpful for key

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