Market liquidity

In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic conform in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold. In a liquid market, the trade-off is mild: one can sell quickly without having to accept a significantly lower price. In a relatively illiquid market, an asset must be discounted in appearance to sell quickly. Money, or cash, is the nearly liquid asset because it can be exchanged for goods and services instantly at face value.

Effect on asset values

The market liquidity of assets affects their prices and expected returns. idea and empirical evidence suggests that investors require higher service on assets with lower market liquidity to compensate them for the higher equal of trading these assets. That is, for an asset with given cash flow, the higher its market liquidity, the higher its price and the lower is its expected return. In addition, risk-averse investors require higher expected utility if the asset's market-liquidity risk is greater. This risk involves the exposure of the asset return to shocks in overall market liquidity, the exposure of the asset's own liquidity to shocks in market liquidity and the effect of market return on the asset's own liquidity. Here too, the higher the liquidity risk, the higher the expected return on the asset or the lower is its price.

One example of this is a comparison of assets with and without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such(a) assets, like the difference between newly issued U.S. Treasury bonds compared to ]