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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 - PowerPoint PPT Presentation
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“New Learning”
Barnard’s Inn HallHolbornLondon EC1N 2HH
Tel: +44 (0)20 7831-0575Fax: +44 (0)20 7831-5208Email : [email protected]
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© Gresham College2007
Mercers’ School Memorial Professor of CommerceMichael Mainelli
Liquidity: Finance In Motion Or Evaporation?
www.gresham.ac.uk
© Gresham College2007
Outline
“Get a detailed grip on the big picture.”Chao Kli Ning
Fluidity in definitionTime, value, probability and moneySettled dis-equilibriaSmall holesLiquidity and lucidityLiquidity crisesBlack holes, white bubblesTrading on ice
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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)
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Who Needs Liquidity?
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Caught Short (In Time)
Accounts receivable turnover =
total credit salesaverage accounts receivable
Accounts payable turnover =
total credit purchasesaverage accounts payable
Inventory turnover =total cost of salesaverage inventory
Acid-test =cash + securities + accounts receivable
current liabilities
Current ratio =current assets
current liabilities
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Caught Short (In Value)
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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]
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Liquid Measures
Resilience
Depth
Tightness
[Source: Holl and Winn, 1995]
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Monnaie des Sources
[Source: http://www.bankofengland.co.uk/]
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Where Has All The Money Gone?
[Source: OECD]
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Back To Basics
[Source: http://en.wikipedia.org/wiki/Supply_and_demand]
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Rising Price Lifts All Boats
P
Q
SupplyDemand
P1
P2
Q1 Q2
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Liquidity P’s, T’s & Q’s
P
Q
SupplyDemand
P1
P2
Q1 Q2
T
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Not Smooth Curvature
P
Q
Supply
Demand
TP1
P2
Q1 Q2
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Not Continuous
P
T
Supply
Demand
QP1
P2
Q1 Q2
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Liquidity Clouds
P
Q
SupplyDemand
T
‘Normal’ liquidity risk
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Predicting Price Movements
Y Axis: Share Identification Code
X Axis: Actual & Predicted Price Movement Bands – the length of the yellow link indicates the difference between the prediction and the actual value - the longest links represent the anomalous trades
Z Axis: The Difference between Actual & Predicted Price Movement Bands
[Source: Z/Yen Group Limited, 2005]
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Liquidity Holes
P
Q
SupplyDemand
T
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Small versus Large
[Source: Z/Yen Group Limited, 2002]
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Bull or Bear?
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Dark Liquidity Pools
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Liquidity or Lucidity?
Liquidity Transparency
Capital atRisk
Spreads
Regulation
PriceFormation
Volatility
TradingCompetition
PriceFormation
ExchangeCompetition
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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.
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Liquidity Crisis 2007?“Water, water, everywhere, nor any beer to sink.”
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An Historical Perspective
Holy Roman Empire currency 1622Tulips 1636South Sea Scheme 1720Northern Europe 1763East India Company 1772Emerging markets 1809-1838Railways 1847-1873Commodities 1890-1920Great Crash of 1929Bretton Woods collapse 1973Savings & Loans 1980
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A Modern Perspective
Third World Debt 1982Black Monday 1987Junk Bonds 1988Japanese Bubble 1990sUS Bond Crash 1994Mexican Crisis 1995Asian Crisis 1997Russian Crisis 1998Long Term Capital Management 1998Dotcom Crash 2000September 11 Disruption 2001Argentine Crisis 2002Credit Crunch 2007
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Bubble, Bubble, Toil and Trouble
Hyman Minsky’s Waterfall
Hedge
Speculative
Ponzi
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Ponzi Borrowers
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Black Holes and White Bubbles
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Modelling Financial Black Holes
P
Q
SupplyDemand
P1
P2
Black Hole ‘Event Horizon’
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characteristics
commodities
Simple Really
companies
money supply
consumers
credit:default rates &rating agencies
savings
goods
equities
property
assets
Brasil, India, Russia, China
confidence & trust
leverage
economic activity
accessmarkets
financial
institutions regulators
liquidity = certainty (value,
timing)
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Avoiding Liquidity Traps
[Source: www.moneyfiles.org]
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Discussion
1. Are all liquidity crises unique, or irrelevant, or useful - or are things different today?
2. When new markets emerge, from where does the liquidity come?
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Liquidity: Finance In Motion Or Evaporation?
Thank you!
“Get a big picture grip on the details.”Chao Kli Ning