Editing Liquidity risk (section)

==Measures of liquidity risk==

===Liquidity gap===
Culp defines the liquidity gap as the net liquid assets of a firm. The excess value of the firm's liquid assets over its volatile liabilities. A company with a negative liquidity gap should focus on their cash balances and possible unexpected changes in their values.

As a static measure of liquidity risk, it gives no indication of how the gap would change with an increase in the firm's marginal funding cost.

===Elasticity===
Culp denotes the change of net of assets over funded liabilities that occurs when the [[liquidity premium]] on the bank's marginal funding cost rises by a small amount as the liquidity risk elasticity. For banks this would be measured as a spread over Libor, for nonfinancial the LRE would be measured as a spread over commercial paper rates.

Problems with the use of liquidity risk elasticity are that it assumes parallel changes in funding spread across all maturities and that it is only accurate for small changes in funding spreads.