Professional Documents
Culture Documents
Jon Danielsson
London School of Economics
2013
To accompany
Global Financial Systems: Stability and Risk
http://www.globalfinancialsystems.org/
Published by Pearson 2013
Introduction to Liquidity
Liquidity
Liquidity crises
just some examples
1998
1997
1987
1914
1864
1763
Almost all financial crises have liquidity as a central
element
Market Liquidity
What is liquidity?
many contradictory definitions. This one from the BCBS is common
Price
$4.07
$4.05
$4.04
$4.02
$4.00
Price
$4.07
$4.05
bid-ask spread
$4.04
$4.02
$4.00
Price
$4.07
$4.05
bid-ask spread
$4.04
$4.02 depth of
best bids
$4.00
Price
depth of
best asks
$4.07
$4.05
bid-ask spread
$4.04
$4.02 depth of
best bids
$4.00
Price
depth of
best asks
$4.07
Market order of size Q = 120, 000
... is transacted at a combination of worsening prices
$4.05 ... has price impact
bid-ask spread
$4.04
$4.02 depth of
best bids
$4.00
Interaction Between
Market Liquidity
and
Funding Liquidity
Funding problems
for speculators
Funding problems
for speculators
Higher margins
Higher margins
Losses on
existing positions
Global Financial Systems 2013 Jon Danielsson, page 31 of 46
Introduction Market liquidity Liquidity interactions Liquidity and asset pricing Policy
Higher margins
Client
Losses on redemptions
existing positions
Global Financial Systems 2013 Jon Danielsson, page 32 of 46
Introduction Market liquidity Liquidity interactions Liquidity and asset pricing Policy
Feedbacks
Cashinthemarket pricing
Allen and Gale
Cashinthemarket pricing
Initial
shock
Cashinthemarket pricing
Initial
Prices falling away
shock
from fundamentals
Cashinthemarket pricing
Initial
Prices falling away
shock
from fundamentals
Difficulties in holding
illiquid risky assets
Cashinthemarket pricing
Initial
Prices falling away
shock
from fundamentals
Cashinthemarket pricing
Initial
Prices falling away
shock
from fundamentals
Risky
assets
become
illiquid
Preference for cash.
Risky assets sold
Difficulties in holding
illiquid risky assets
So...
Policy
Motivation