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(1) An adverse cost or return variation stemming from the lack of marketability of a financial instrument at prices in line with recent sales. Liquidity risk may be a problem because a given position is very large relative to typical trading volumes or because market conditions are unsettled. Liquidity risk is usually reflected in a wide bid-asked spread and large price movements in response to any attempt to buy or sell. (2) In a depository institution, the cost or penalty associated with unanticipated withdrawals or the failure to attract expected deposits. Liquidity risk is usually managed by limiting holdings of illiquid positions, by matching asset and liability maturities, and by limiting any maturity gap. Also called Marketability Risk.
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