Understanding the liquidity premium
The liquidity premium has moved from theory to practical reality, first in the market-consistent embedded value metric and then the Solvency II directive. Barrie & Hibbert’s Craig Turnbull explains the theory behind the liquidity premium and how to implement it
The liquidity premium, the concept that illiquid assets have lower prices than their equivalent liquid ones, has recently emerged from relative obscurity to become a major issue for European insurance, both in market-consistent embedded value (MCEV) reporting and the proposed Solvency II directive. Research on this topic has focused on how to observe the level of liquidity premium embedded in the market prices of assets such as corporate bonds. Less work has been done on how to apply these
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