Risk and Liquidity

Risk is endogenous. It builds up during booms, as measured risks fall and individual market participants increase their risk-taking. Risk is then manifested during downturns, as measured risks rise and individual market participants recoil from risk taking. Prices (including the market price of risk) therefore play a dual role: they are simultaneously a reflection of market participants’ actions as well as an imperative for their actions. This book is organized around several practical examples in financial economics that illustrate these principles.