Liquidity And Liquidity

847 Words4 Pages
Liquidity is defined as an important factor, which influences the asset prices. According to the paper of Amihud & Mendelson (1991), an asset is liquid if it can be bought and sold very quickly in the current stock market with a lower cost. In addition, due to the evidence of the stock market crash of October 1987, it shows that the decreasing in liquidity, also leads to the decreasing in asset price. In general, we can see the private benefits also increasing due to the increasing of the liquidity of the asset, because the issuers could sell more liquid securities at a higher asset price. Therefore, it shows when the financial analysts value the assets; they should not only consider the expected return and risk of the asset, but also the liquidity.…show more content…
Initially, the liquidity could raise the inflation in the asset prices, if the excess liquidity increases the demands for a fixed supply of assets. Moreover, an increase in liquidity could fall together with an increase in asset prices, if both stem from improved economic prospects, such as: a cyclical upturn can increase the money demand simultaneously, therefore it will improve the prospects for corporate earnings and leads to the stock pricing arise. In addition, the other possible situation would be that an interest rate decrease due to the increase of the liquidity may lead to an increase in equity prices by reducing the discount factors that price future cash…show more content…
Arbitrages do exist, due to the changes of the factors of foreign exchange rate and interest rate. Through the different foreign exchange rate of the currencies between different countries, it gives the opportunities to the arbitrageurs to gain the profits through buying a currency with a low rate in one country and simultaneously selling it in another country with a higher rate. Meanwhile, the same procedures for the interest rate, the arbitrageur buying a foreign currency with domestic currency and profit from the difference between the interest rates of two countries. Moreover, in case of market liquidity increasing, the asset prices also increasing, so the issuers will obtain more benefits. In addition, monetary policy has no significant effects on asset prices, but it still reacts actively to the asset
Open Document