There are two types of liquidity risk.Funding, or cash flow, liquidity risk is the concern a corporation has when it wonders if it has the means to pay its bills and funds its liabilities. Market, or asset, liquidity risk is an inability to exit a position or sell an asset. Owning real estate that cannot be sold due to bad market conditions is a market liquidity risk. Market liquidity risk can come from the microstructure. For example, many over-the-counter markets are thin, meaning few buyers and sellers are conducting business, making an asset difficult to sell. Complex assets are illiquid because their complexity makes them difficult to sell. How interchangeable an asset is, and the time needed to sell it, also impact liquidity. Liquidity risk measures include the bid-ask spread, position size relative to the market, and resiliency. Less liquid assets typically have a wider bid-ask spread. Large positions in a shallow, less resilient market tend to be less liquid, as well. One common way to incorporate market liquidity risk in a financial risk model is to adjust the measure by adding half of the bid-ask spread. For example, an investor has a $1 million position in a single stock with an ask price of $20.40 and a bid of $19.60. The bid-ask spread percentage is 4% ($20.40 minus $19.60/$20). Multiply the $1 million position by half the bid-ask spread percentage – $1 million X 2%– to get $20,000. The liquidity cost if the investors needs to sell the position is $20,000, which is the position’s liquidity-adjusted value at risk.