Liquidity Premium

Estimating and Applying the Liquidity Premium

The liquidity premium – the concept that illiquid assets have lower prices than equivalent liquid ones – has recently emerged from relative obscurity to become a major issue in financial reporting (MCEV) and regulatory capital assessment (Solvency II) in European insurance.

We are actively engaged in research on this topic, looking not only at estimating the liquidity premium, but also at how to apply it when valuing insurance liabilities. We have collected all of our research and insights on the liquidity premium together on this page, and our work has also been published in Life & Pensions Magazine.

For an introduction to this topic, we recommend John Hibbert’s Insight article, Liquidity Premium: Myth or Reality?

In addition to our research, we also provide Liquidity Premium estimation and consultancy services to help insurers get an informed and independent view. To find out more, just contact us at .(JavaScript must be enabled to view this email address) .

Read our Research:

Liquidity premiums and contingent liabilities

This note explores how market-consistent liability valuation methodology can be adjusted to allow for liquidity premiums, and the implications this has for the behaviours of the valuation of different types of liabilities.
A Simple Proxy for Liquidity Premium

In October the CFO Forum revised its MCEV principles to allow the inclusion of the liquidity premium. They do not, however, say anything on how it should be calculated. Given the material impact of any estimate on the solvency position of the balance sheet, this begs the obvious question - how good can such a proxy be? Here we examine this and other questions.
A Measure of the Liquidity of Insurance Liabilities

The aim of this note is to add to the discussion of how an objective, quantitative measure for the liquidity of specific classes of insurance liabilities might be developed, by tentatively putting forward a framework for assessing the predictability of insurance cash flows.
Liquidity Premium - Summary of Estimation Methods

This report is concerned with the estimation of liquidity premia embedded in the prices of financial instruments. Our focus is on estimation methods and understanding their practical challenges and sensitivities.
Liquidity premium: myth or reality?
Liquidity Premium - Literature review of theoretical and empirical evidence

The price of liquidity – the liquidity premium – and its variability is currently the subject of enormous interest from accountants, actuaries, financial intermediaries and regulators. The outcome of the debate will have an impact on the future price of certain financial products and, arguably, the cost of finance for firms using the capital markets. The primary purpose of this report is to provide a summary of the main conclusions of researchers, with the objective of refining liquidity premium estimation methods.

Barrie & Hibbert