|This article is of interest to the following WikiProjects:|
I have rewritten much of the article. I think it needed improving in two areas particularly:
It isn't that "ones that are over or under valued will be hard to move, becoming illiquid". That is an argument that simply calls on the definition of liquidity.
The effect of liquidity on price was not described thoroughly enough. When a stock/commodity is illiquid you often have to accept a wide difference between a buy and a sell price. You pay more for it when you buy and you accept less for it when you sell. Whether the price of a liquid investment is higher or lower than an illiquid one depends on how many buyers and sellers there are. In boom times illiquid investments (paintings, old vehicles) shoot up in price to ridiculous levels and in bust times old Ferraris are two a penny.
Psb777 15:09, 30 Jan 2004 (UTC)
And having read that last para again I am forced to answer myself with "well, not necessarily and it all depends: it's much more complicated than that" Psb777 15:27, 30 Jan 2004 (UTC)
I just do not know what the new last paragraph on liquidity risk means. And if I don't I modestly claim there will be a fairly large number of readers who don't. There are a whole lot of undefined terms. Paul Beardsell 14:48, 23 Feb 2004 (UTC)
- Read Basel III and its references. Liquidity risk is now very clearly and quantitatively defined as of 2011 internationally, and most G8 countries will implement these rules in 2012. Major detailed explanation of the various ways to measure liquidity risk should happen now, because of these new and strict definitions. It means effectively that liquidity risk is no longer a management accounting concept but rather one that any chartered accountant would be required to know. Even when considering major currencies like the US dollar, there are extreme scenarios (war threat with China leading to dump of US dollar bonds, for instance) which big banks etc. are now legally REQUIRED to consider explicitly. This makes liquidity risk a central not a marginal accounting concept.
I continue to struggle: Isn't the "liquidity risk" to which you refer a risk that "market liquidity" might be lower than required at some point? In which case there are not two separate "liquidity" concepts, "market liquidity" and "liquidity risk" , but one "liquidity" concept and another, the "liquidity risk" concept. And the "liquidity risk" concept should be in another article which we can "See also" from here and from where you link back here. Paul Beardsell 14:55, 23 Feb 2004 (UTC)
- Again refer Basel III references to see how they define it. What liquidity is "required" is an open question, a rich seller might be able to take the price drop of selling a lot of something at once, while an over-exposed seller might not. Quantitative tests leading to qualitative definitions.
I'm pretty convinced of the above point. I have moved the article. There is still a need to better explain the two types of risk. One I reckon I understand. The other, phew! Paul Beardsell 15:01, 23 Feb 2004 (UTC)
What is "portfolio liquidity risk"? Who bears the risk? How and why does it occur? Exactly what is or isn't liquid in a portfolio? Paul Beardsell 16:36, 23 Feb 2004 (UTC)
- As I understand it, portfolio liquidity risk reflects the fact that the various investments held in a portfolio have different liquidity profiles, that is, some will be easier to sell than others. A portfolio manager must structure their holdings so that a number of illiquid investments do not mature at the same time. They must also look at future contingencies that could make the liquidity structure of their portfolios more risky. As fot who bares the risk, as allways it is the owner(s) of the assets in the portfolio (but you can try to get your stockbroker or fund manager to bare some of the responsibility for his recommendations - Good luck). mydogategodshat 16:54, 23 Feb 2004 (UTC)
- Essentially right. Scenarios on a portfolio will identify situations where multiple illiquid investments might mature when cash or more liquid assets are needed, and it's up to a portfolio manager to rejuggle to prevent such outcomes, or at least to reduce their probabilities to an insurable/hedge-able exposure level.
In my view the paragraph...
- The risk of illiquidity need not apply only to individual investments. Whole portfolios are subject to liquidity risk. Financial institutions and asset managers that oversee portfolios are subject to what is called "structural" and "contingent" liquidity risk. Structural liquidity risk, sometimes called funding liquidity risk, is the risk associated with funding asset portfolios in the normal course of business. Contingent liquidity risk is the risk associated with finding additional funds or replacing maturing liabilities under potential, future stressed market conditions.
...requires lots of explanation or deletion. I ran a business providing software to stockbrokers and market makers for over 10 years so whereas finance is not my first language I can speak it fairly well as a second. There is a lot of unexplained jargon here. I think when fully explained it may lead to us either realising that what is being talked about is not market liquidity (which is the title of the article), but another type of liquiity which may or may not require a different Wikipedia article.
Paul Beardsell 03:58, 27 Mar 2004 (UTC)
What is market liquidity?
Thanks for everyone contributing to this page.
I think we and the economics community (and the world for that matter) have not been clear about what market liquidity means. The tendency is to confuse the term liquidity with price and price elasticity. Please help me clear this up.
Liquidity means the difference between the buy price and the sell price at a particular instant. If you buy a painting for $10,000 from an art dealer and then sell it back the same day, you would probably only get $7,000 at best. That painting is less liquid than 100 shares of IBM which you can buy and sell the same day while paying a fraction of a percent in commission to a stock broker. If you hold on to the IBM shares, their price may go up or down but that does not mean they are not liquid. This concept is in contrast to price and price elasticity which depend on supply and demand.
The price of something depends on how many people want it and how much of it there is. So the price of your Ferrari can go to one cent but that's not because it's an illiquid asset. It's because supply and demand have pushed its price down. Similarly, the price of your painting can go to way up if the artist dies but again, that has nothing to do with liquidity.
Price elasticity can also effect the price of something but that has more to do with saturation of the market than anything else. An asset's price is said to be inelastic if the quantity transacted has little effect on the pricing. If you trade millions of shares of IBM one day, then the price of the stock may be affected because there is not sufficient demand for that quantity but you'll still pay roughly the same percent commission to the broker. So pricing and pricing elasticity are different than liquidity.
My measure for liquidity is (buy price - sell price)/sell price. So the most liquid asset is your own currency. If you live in the US, then you can trade $20 in any denomination for $20 in any other denomination without any commission so US dollars liquidity = infinity. If you want to trade another currency for US dollars then you pay a commission so the liquidity of that currency is less than your native currency.
I would be interested in people's opinion of the ranking of liquidity. For instance: US dollars, postage stamps, frequent flier miles, public stocks, bonds, real estate, paintings, automobiles. What is your ranking of liquidity?
don.brown 16:37, 24 Nov 2004 (UTC)
It isn't a question of what we think but a question of fact. However sensible (or not) what we write, we cannot just make it up. Paul Beardsell 10:24, 25 Nov 2004 (UTC)
Dear sir,I am a little confused the way liquidity was calculated using the formula given.Can i be made more clear with other example.
(I join the sentence before, using the formula given, the liquidity of 20$ is zero, not infinity, because (20$-20$)/20$ = 0 . Ivan Zakoutsky)
(I think mister Brown means: (buy price - sell price)/buy price. Resulting in a scale from 0 to 1. 0 for highly liquid and 1 for illiquid
- This page and the page on market depth should be made consistent with each other, and definitions need to be made more precice. At present the page on market depth says
In finance, market depth is the size of an order needed to move the market a given amount. If the market is deep, a large order is needed to change the price. Contrast with liquidity, the ease to find a trading partner for a given order.
Degrees of Liquidity
Thank you for your article. Where can I find information about the comparative degrees of liquidity of various assets? A list of accepted degrees of liquidity, such as cash through trademarks. Thank you. cp
In the section called Proxies, the phrase "divide liquid assets to short term liabilities" has no meaning to me. One may divide A by b, or one may divide A into B. May I request a clarification. John Sinclair (talk) 17:45, 29 October 2011 (UTC)
Does El-Erian use "illusion of liquidity" to indicate the same issues about which some have used "Cheshire multiple" (see Efficient-market hypothesis)? Under the current setup, most are losers, by definition; yet, this does not come into the discussion (sustainability, for example). jmswtlk (talk) 14:29, 18 February 2015 (UTC)