Liquidity in the Time of COVID

Abstract

While the 2008 shifted the attention from individual trades to netting-set counterparty risk, the evolving 2020 storyline is driven by liquidity risk at the funding-set level. The COVID turmoil brings General Wrong Way Risk (GWWR) to the fore while the impending IBOR transition amplifies portfolio-wide liquidity risk by nominally decoupling fixing rates from funding costs. This confluence of circumstances reopens the never quite abated debate on the “black art of FVA”.