Mercers school memorial professor of commerce michael mainelli
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Mercers’ School Memorial Professor of Commerce Michael Mainelli. Liquidity: Finance In Motion Or Evaporation?. Outline. Fluidity in definition Time, value, probability and money Settled dis-equilibria Small holes Liquidity and lucidity Liquidity crises Black holes, white bubbles

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Mercers’ School Memorial Professor of Commerce Michael Mainelli

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Mercers school memorial professor of commerce michael mainelli

Mercers’ School Memorial Professor of CommerceMichael Mainelli

Liquidity:

Finance In Motion Or Evaporation?


Outline

Outline

  • Fluidity in definition

  • Time, value, probability and money

  • Settled dis-equilibria

  • Small holes

  • Liquidity and lucidity

  • Liquidity crises

  • Black holes, white bubbles

  • Trading on ice

“Get a detailed grip on the big picture.”Chao Kli Ning


Fluidity in definition

Fluidity In Definition

“the probability that an asset can be converted into an expected amount of value within an expected amount of time”

liquidity = certainty (value, time)


Who needs liquidity

Who Needs Liquidity?


Caught short in time

Caught Short (In Time)


Caught short in value

Caught Short (In Value)


Caught off guard in all probability

Caught Off-Guard (In All Probability)

Certainty = % likelihood [value fall/rise + time fall/rise]

Example: watch =

[£1,000 – 50%(£500),

1 week + 50%(2 weeks)] =

[£750, 2 weeks]


Liquid measures

Liquid Measures

  • Resilience

  • Depth

  • Tightness

[Source: Holl and Winn, 1995]


Monnaie des sources

Monnaie des Sources

[Source: http://www.bankofengland.co.uk/]


Where has all the money gone

Where Has All The Money Gone?

[Source: OECD]


Back to basics

Back To Basics

[Source: http://en.wikipedia.org/wiki/Supply_and_demand]


Rising price lifts all boats

Rising Price Lifts All Boats

P

Demand

Supply

P2

P1

Q

Q1

Q2


Liquidity p s t s q s

Liquidity P’s, T’s & Q’s

P

Demand

Supply

P2

P1

T

Q

Q1

Q2


Not smooth curvature

Not Smooth Curvature

P

Demand

Supply

P2

P1

T

Q

Q1

Q2


Not continuous

Not Continuous

P

Demand

Supply

P2

P1

Q

T

Q1

Q2


Liquidity clouds

Liquidity Clouds

Demand

Supply

P

T

‘Normal’ liquidity risk

Q


Predicting price movements

Predicting Price Movements

[Source: Z/Yen Group Limited, 2005]


Liquidity holes

Liquidity Holes

Demand

Supply

P

T

Q


Small versus large

Small versus Large

[Source: Z/Yen Group Limited, 2002]


Bull or bear

Bull or Bear?


Dark liquidity pools

Dark Liquidity Pools


Liquidity or lucidity

Liquidity or Lucidity?

Price

Formation

Transparency

Liquidity

Trading

Competition

Capital at

Risk

Regulation

Exchange

Competition

Spreads

Volatility

Price

Formation


With apologies to jonathan swift

With Apologies To Jonathan Swift

So, financiers observe, small pools

suck larger pools’ liquidity;

yet tinier pools drain other drops,

and so on to aridity.


Liquidity crisis 2007 water water everywhere nor any beer to sink

Liquidity Crisis 2007?“Water, water, everywhere, nor any beer to sink.”


An historical perspective

An Historical Perspective

  • Holy Roman Empire currency 1622

  • Tulips 1636

  • South Sea Scheme 1720

  • Northern Europe 1763

  • East India Company 1772

  • Emerging markets 1809-1838

  • Railways 1847-1873

  • Commodities 1890-1920

  • Great Crash of 1929

  • Bretton Woods collapse 1973

  • Savings & Loans 1980


A modern perspective

A Modern Perspective

  • Third World Debt 1982

  • Black Monday 1987

  • Junk Bonds 1988

  • Japanese Bubble 1990s

  • US Bond Crash 1994

  • Mexican Crisis 1995

  • Asian Crisis 1997

  • Russian Crisis 1998

  • Long Term Capital Management 1998

  • Dotcom Crash 2000

  • September 11 Disruption 2001

  • Argentine Crisis 2002

  • Credit Crunch 2007


Bubble bubble toil and trouble

Bubble, Bubble, Toil and Trouble

Hyman Minsky’s Waterfall

Hedge

Speculative

Ponzi


Ponzi borrowers

Ponzi Borrowers


Black holes and white bubbles

Black Holes and White Bubbles


Modelling financial black holes

Modelling Financial Black Holes

P

Supply

Demand

P2

P1

Q

Black Hole ‘Event Horizon’


Simple really

Simple Really

Brasil, India, Russia, China

economic activity

goods

consumers

markets

companies

access

characteristics

savings

confidence &

trust

liquidity =

certainty (value, timing)

assets

property

financial

institutions

equities

credit:

default rates &

rating agencies

regulators

commodities

leverage

money supply


Avoiding liquidity traps

Avoiding Liquidity Traps

[Source: www.moneyfiles.org]


Discussion

Discussion

  • Are all liquidity crises unique, or irrelevant, or useful - or are things different today?

  • When new markets emerge, from where does the liquidity come?


Liquidity finance in motion or evaporation

Liquidity: Finance In Motion Or Evaporation?

Thank you!

“Get a big picture grip on the details.”Chao Kli Ning


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