Original title: Illiquidity at Risk
Demetrio Lacava, Paolo Santucci de Magistris · September 2026
Financial markets run smoothly only when trading is easy, meaning assets have high liquidity. When trading suddenly freezes, investors and regulators face serious trouble. To tackle this, researchers created a new metric named Illiquidity-at-Risk, or IlliQaR. It measures how bad extreme market dry-ups can get. They tracked trading volume and sharp price swings using high-frequency data, testing models that account for abrupt, sudden jumps in trading conditions. They found that standard models fail during market stress because they ignore these sudden shocks, severely underestimating how badly liquidity can vanish. Factoring in these jumps makes predictions accurate. Furthermore, extreme dry-ups in individual stocks bundle together when the broader S&P 500 index suffers stress, showing that index troubles warn of market-wide liquidity freezes.
Suppose you drive to the airport for a flight. On most days traffic moves steadily and you can leave at the usual time. But sometimes an accident closes lanes with no warning, and a run that normally takes twenty minutes suddenly takes two hours — and your old routine is useless. In this paper, smooth market days play the role of steady traffic, and unexpected market shocks play the role of the closed lanes; forecasting only the calm days badly underestimates how expensive trading can get when the shock arrives.
Investors and regulators rely on markets staying liquid enough to trade. When liquidity suddenly evaporates, selling becomes expensive and can force panic. A metric that forecasts extreme dry-ups — and shows that stress in the S&P 500 spreads to individual stocks — gives earlier warning, so people can prepare instead of being caught out.
The abstract doesn't specify causal direction or lead time. The evidence is based on the S&P 500 and 25 large U.S. equities, so it may not generalize to smaller stocks or other markets. It also doesn't say how the metric performs outside the sample period or against other measures.
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Illiquidity at Risk — Demetrio Lacava, Paolo Santucci de Magistris
Abstract licence: CC0
Explanation generated by Synthesis from the abstract — it is not the original paper. This is a preprint, so it hasn't necessarily been peer reviewed.