As witnessed throughout the latest Great Recession and its repercussions, realizations of market risk and deterioration of credit quality quickly translate into market freeze-up and drain of liquidity in the markets hit. Examples of the latter range from the ABS market crash through the freeze up of Covered bonds to the dysfunction of the market for Sovereign debt of the European Periphery. The ev
ents reinforced the fact that liquidity risk a factor tat needs being tackled in its own right and managed appropriately. Thus, DCH llc strove to provide adequate solutions to this overlooked part of risk management. The pilot project of DCH llc, Liquidity Assessment and Risk Calculator or LARC, utilizes the liquidity policy construct described in “Liquidity Risk Theory and Coherent Measures of Risk” by Carlo Acerbi and Giacomo Scandolo, applies it to high frequency tic data and assesses the systemic and idiosyncratic illiquidity of an asset. LARC has been successfully applied to equity, residual value of automobiles and fixed income assets. The latter application has been fully developed and tested, some of the landmark merits being the prediction of the freeze-up of Greek sovereign bonds as early as the end of Q3 of 2009. Going further back, 2007 Q2 data heralded the pre-Lehman explosion in the yield spreads of Financials and Agency bonds and the ensuing illiquidity. Beyond LARC, the ultimate liquidity solution for investment banking purposes and asset management, DCH llc’s team develops a solution focused on commercial banking that provides reliable and easy to run Liquidity at Risk (LaR) tool utilizing leptokurtic modeling. DCH llc focuses on computationally intensive market liquidity and liquidity at risk solutions using high frequency data. These are the most sophisticated types of tools for managing liquidity risk and DCH llc’s mission is to popularize their use as they provide both reliable predictive power and state-of-the-art approach to management of liquidity risk.
