For example, the liquidity of each asset position in an investment portfolio can be measured as the number of days it would take to liquidate that position, assuming that the firm limited its trading on any day to 20 percent of average daily volume. Aggregate portfolio liquidity would be the weighted average of this statistic across the entire portfolio.
With this relatively simple measurement, which requires only minimal modeling effort, the risk manager can flag the most illiquid positions as a special concern and can monitor changes in the portfolio’s aggregate liquidity over time. Of course, as I discuss below, this simple measurement may not identify the full range of potential liquidity risks.