1.1 Background of Study The concept of liquidity has been a complex financial concept. However, the characteristics of asset that are liquid are observable. In its simplest form, liquidity implies the ease at which a financial asset trades. Liquidity of any market is characterized by the ability of investors to buy and sell securities easily. Illiquidity occurs when an asset or securities cannot be transacted quickly and converted into cash (Clark 2008). According to Pastor and Stambaugh (2002), liquidity denotes the ability to trade large quantities quickly, at low cost, and without moving the price. Liquidity plays a great role in attempting to resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle (Amihud, Mendelson and Pedersen, 2005). Liquidity is generally described as the ability to trade large quantities quickly at low cost with little price impact. There are four dimensions associated to this definition of liquidity, namely, trading quantity, trading speed, trading cost, and price impact (Liu, 2006). According to Pastor and Stambaugh (2002), the …show more content…
Generally, the concept connotes a favorable and desired function that reflects a well-organized and functional financial market. According to Gabrielsen, Marzo and Zagaglia (2011), a market is said to be liquid when the prevailing structure of transactions provide a prompt and a secure link between the demand and supply of assets, thus delivering low transaction costs. Researchers have not been able to come up with unique definition of the term liquidity that would possibly capture all the properties of liquidity. Most the researchers such as Wyss (2004) tend to think that the reason of a unique definition is due to the fact that liquidity has several dimensions. Liquidity concept is also a complex concept that can be defined in several different
The trading volume shows the overall activity of the Stock and Bond Market of how much is being sold and bought in one period of time. As a result, they show the market liquidity and the supply and demand for securities. When the Volume works an early indicator so when it declines so do the prices this indication of volume changes will be vital for the next chapter of Warren Buffet’s Market philosophy (Cabot Wealth, 2017).
Liquidity premium theory – It is a theory that suggested that the yield of securities in one mature have influence on the yield of another securities. The investors are willing to invest in long-term securities as long as they are provided liquidity premium as compensation due to their long exposure to the long-term risk. As a result of this compensation, the investors are more motivated to in long-term securities. Hence, creating an upward sloping yield curve.
Rob, Dixon, and Holmes Phil. Capital market; Stock exchanges; Foreign exchange market; Futures market. London: Chapman and Hall, 1992.
Assuming that there are no costs applied, and the investors have the ability to buy and sell securities and they also have the knowledge of any change; no costs for buying or selling of securities for brokers for example. Modigliani and Miller’s assumption is that all of these capital market factors which is needed for trading of securities are all perfect.
...y with abundant liquidity: a new operating framework for the Federal Reserve. Policy Brief PB14, 4.
Quantitative easing is a nontraditional monetary policy that the central bank used when the economy is in recession. The first country used quantitative easing, as monetary policy is Japan in 2001. It is getting well known when the United States of America adopted quantitative easing policy to boost its economy from the economic crisis that happened in 2008. In general, quantitative easing means that the central bank will print more money to buy long-term bonds from commercial banks or private sectors to increase the money supply in the financial market. By inputting more money to buy long-term bonds, it will lower the long-term market interest rate and increase the market price of the long-term bonds, which will lead to lower the earnings from long-term bonds. At low interest rates, it promotes people to consume more and borrow more money from the financial institution. As a result, it stimulates the economy and slowly recovers from the financial crisis. In this paper, it will talk about the three stages of quantitative easing policy in the US from 2008 to 2013, the effect of quantitative easing to the US and the world and the consequence of quantitative easing in the US market.
The current ratio is a financial ratio that measures whether a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. In other words, it shows how much that a company must pay it 1 rupee of liability.
Liquidity risk was appeared as a major risk in banking so; liquidity management is the top priority for banks management and regulators.
Tabak, D. (2002).A CAPM-Based approach to calculating illiquidity discount. NERA Economic Consulting Retrieved from http://www.nera.com/extImage/5657.pdf
Liquidity ratio often called working capital ratio is the ratio used to measure how liquid a company by comparing all components in current assets and current liabilities components. There are two assessments to measure this ratio, as follows:
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
Today, businesses need to utilize many tools to maximize profit and stay alive in the market. Several companies often look at financial ratios to better understand a company’s financial condition and their performance. All of the ratios play a large role in these companies, both individually, as well as collectively.
I am currently majoring in Finance Management. Most of the time people think of finance as just managing money. However, finance is needed for so much more! The finance industry deals with starting businesses, developing new products, expanding markets, as well as everyday things like saving for retirement, purchasing a home, and even insurance. The stock market, asset allocation, portfolio analysis, and electronic commerce are all key aspects in finance. In this paper, I will explain how these features play a vital role in the industry, along with the issues that come with these factors.
In the modern world, financial markets play a significant role, with huge volumes of everyday dealings. They form part of contemporary economic lifestyle and determine the level of success of many people. Humans have always been uncertain of what the future holds and thus, tried to forecast it. The forecast of course cannot omit the likelihood of “easy money” by forecasting the prices of equity markets in the future.
That an individual will take advantage of the convenience and speed of the electronic system to mask illegitimate or illegal transactions – i.e., money laundering.