It also beat its peers in derivatives exposures, trading assets, cross-border risk, liquidity and market risk.
Far better, reckons Mr Scholes, if firms were to buy protection against liquidity risk in the market.
When positions and exposures cannot be determined rapidly--as was the case, for example, when program trades overwhelmed the system during the 1987 stock market crash--potential outcomes include highly risk-averse behavior by market participants, sharp declines in market liquidity, and high volatility in asset prices.
One of our concerns was that the infrastructures of those markets and the risk- and liquidity-management practices of market participants would not be adequate to deal in an orderly way with the collapse of a major counterparty.
With no risk of inflation or liquidity-crisis-induced market crashes, partial privatization of Social Security might eventually become feasible.
FORBES: Why Americans Are Skeptical About Private Social Security Accounts
Liquidity provision by the central bank reduces systemic risk by assuring market participants that, should short-term investors begin to lose confidence, financial institutions will be able to meet the resulting demands for cash without resorting to potentially destabilizing fire sales of assets.
The need for liquidity was already addressed in deciding the apportionment among personal risk, market risk and aspirational risk.
FORBES: Investors Learn The Hard Way That Liquidity Is King During Market Meltdowns
As U.S. money market funds become more risk averse in the face of renewed sovereign debt woes in Europe, dollar liquidity has begun to dry up in the Old Continent.
While commodity prices are being fueled in part by excess liquidity chasing risk, as developed economies follow through with loose monetary policy, the dynamics behind emerging market currency fluctuations, especially the real, are traced out by their interaction with China.
FORBES: Brazil's Currency Pickle: Mounting Inflation and Real Appreciation
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