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Emerging Markets – Liquidity Risk

Trading Term

Liquidity risk is the possibility that positions cannot be transacted quickly at reasonable prices. In emerging markets, narrower bid‑ask spreads during calm periods can widen abruptly amid stress, and order books may thin, amplifying price impact.

Drivers and diagnostics: Market depth depends on market‑maker incentives, settlement infrastructure, and regulatory design (short‑selling rules, circuit breakers). Indicators include turnover ratios, free float, average daily volume, and failures‑to‑deliver statistics.

Portfolio management: Position sizing, staggered execution, and use of local brokers can reduce slippage. Liquidity premia should be embedded into required returns; mandates must align with redemption terms to avoid forced selling during outflows.

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