Market liquidity risk is the risk that a market participant will be unable to buy or sell assets in the desired quantity within a given period without significantly affecting the asset's price, often due to insufficient market depth or disruptions.

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This means that, in times of stress or low market activity, attempting to exit a position or liquidate assets quickly can result in unfavorable prices or even an inability to complete the transaction at all.

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Market liquidity risk can be seen when owning real estate during a market downturn. Even if the property has substantial intrinsic value, needing to sell it quickly in unfavorable conditions may result in accepting a significantly lower price due to a lack of buyers. This difficulty in selling at a fair price illustrates market liquidity risk.

Another example involves complex financial instruments like collateralized debt obligations (CDOs). During the 2008 financial crisis, the market for these assets dried up. With no buyers, holders often couldn't sell them or had to accept heavy losses to do so.

In contrast, assets such as U.S. Treasury bonds or large-cap stocks (like those in the S&P 500) typically have low market liquidity risk. These are supported by deep, active markets, allowing for quick sales at prevailing market prices.

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