The Global Economic System: How Liquidity Shocks Affect by George Chacko, Carolyn L. Evans, Hans Gunawan, Anders L.
By George Chacko, Carolyn L. Evans, Hans Gunawan, Anders L. Sjoman
Written for monetary execs, the authors completely clarify the fashionable international credits method; the jobs of banks, hedge cash, insurers, principal banks, loan markets, and different members; and the credit-related tools they depend upon. specifically, the authors light up the the most important value of liquidity, and express why liquidity disasters were the major reason for all significant marketplace crashes for the previous numerous a long time. the worldwide economic climate completely examines fiscal environments within which sluggish de-leveraging results in lengthy slow progress, and compares modern-day setting to different classes of deleveraging, comparable to the good melancholy and the japanese financial meltdown of the '90s and '00s. It predicts power pathways for the present predicament, and provides crucial information to either policymakers and funding decision-makers.
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Extra resources for The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises
Therefore, the equity and bond market were not out of sync with each other舒they both predicted increased default risk for WorldCom. 10. 11. Time series of default spread versus liquidity spread for WorldCom bond What this puzzle teaches us is to never use the aggregate credit spread of a corporate bond as an indicator of default risk. The aggregate credit spread is composed of both a default spread and liquidity spread, and the liquidity spread needs to be separated out to isolate the default spread in order to form conclusions about the chances of default of a bond issuer.
However, it has become common among practitioners, in the popular press and even in academic circles, to simply use the terms liquidity risk and liquidity risk premium, so we will do so in this book as well. Keep in mind, however, that the risk being referred to is the likelihood of illiquidity. Liquidity refers to how quickly and at what cost one can monetize an asset, whether that is a financial asset such as a stock or a real asset such as a commercial building. If one has an asset whose 舠true,舡 or fundamental, value is $10, and one can instantly convert that asset into $10 of cash or cash equivalent, then we think of the market for that asset as perfectly liquid.
Second, the security舗s price volatility increases substantially. The increase in volatility greatly amplifies the effect of the order imbalance resulting in a hugely asymmetric quantity structure of bid and ask prices around the fundamental value of the security. The second solid line shows the result of the amplification effect of increased volatility. In this example, for transaction sizes of 10,000 shares a seller is only able to sell at prices that are 10% lower than the fundamental value of the security舒that is an enormous decrease in the price of the security to the seller.