By Andria van der Merwe
Andria van der Merwe offers an intensive advisor to the severe instruments had to navigate liquidity markets and price defense pricing within the presence of industry frictions and data asymmetries. this is often crucial examining for an individual with an curiosity in liquidity types, industry constructions, and buying and selling mechanisms.
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Additional info for Market Liquidity Risk: Implications for Asset Pricing, Risk Management, and Financial Regulation
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2008, “The Panic of 2007,” Prepared for the Federal Reserve Bank of Kansas City, Conference, Jackson Hole, WY. Gorton, G. 2009, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” Prepared for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference: Financial Innovation and Crisis, May 11–13, 2009. Gorton, G. 2009, “Information, Liquidity, and the (Ongoing) Panic of 2007,” American Economic Review, Vol. 99, No. 567–572. Gorton, G. 2008, “The Subprime Panic,” National Bureau of Economic Research, Working Paper 14398.
Those who purchased the AAA-rated tranche of a collateralized debt obligation (CDO) had no reason to believe that the investment was risky. Due to the apparent safety of these securities, the demand from these participants was too high relative to the true risks in these securities. This outsized demand created incentives for financial 22 Market Liquidity Risk intermediaries to generate securities that appeared safe, thus increasing the supply of securities with hidden risks. During normal times, the perception of abundant liquidity is sufficient for markets to function.
A case in point is the reduction in bid-ask spreads on the National Association of Securities Dealers Automated Quotations (NASDAQ) following the introduction by the US Securities and Exchange Commission (SEC) of two regulatory changes in 1997. The limit order display rule forced NASDAQ dealers to execute or display any customer’s limit orders better than their own, and the “quote rule” required dealers trading in multiple venues to make their best quotes available to the public. Demsetz’s replacement of the Walrasian auctioneer with market markers also introduced the role of inventory in price formation.