GERMANY - A study conducted by Union Investment has claimed methods for measuring portfolio liquidity risks are insufficient. It also suggests German institutional investors are already less concerned about this risk measure, despite the recent crisis.
The research found 72% of investors were affected by liquidity problems during the crisis yet only 6% of the 85 capital markets specialists interviewed at German banks, insurance companies, foundations, pension funds and corporations recently rated the liquidity risk to be an important concern.
The study, carried out between April and June this year under Henner Schierenbeck, professor at the University of Basel, also found that "present methods of assessing liquidity risk are severely lacking".
He concluded that external liquidity risk can only be measured in markets where pricing is still possible. So once volatility spikes and prices become indeterminable, liquidity risk becomes indeterminable.
Looking specifically at liquidity risk, the Union report concluded this can only be measured with sufficient data, which is mostly only available for equity holdings, so certain positions in the portfolio could again be difficult to assess.
"It is up to investment practitioners and academics to advance the development of risk models," said Union Investment.
"Until then, investors should be aware of the inadequacies of current risk assessments and should rely more heavily on scenario-based assessments for their cash management and financial planning," added Alexander Schindler, a member of Union Investment's board of managing directors with responsibility for its business with institutional clients.
According to the survey, security was the major concern for 81% of the investors questioned between April and June, while in pre-crisis 2007 only 20% saw this as a problem. At that time, liquidity was a concern for 40% of people questioned.
"It seems that even extreme market events can be rapidly forgotten", argued Schindler.
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com
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