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Market Liquidity

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Market Liquidity

A Primer

Brookings Institution,

5 min read
5 take-aways
Audio & text

What's inside?

Signs point to a decline in market liquidity, and it may get worse before it gets better.

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Editorial Rating

9

Qualities

  • Analytical
  • Innovative
  • Overview

Recommendation

A number of signs indicate that market liquidity has fallen since the 2007–2009 financial crisis. If liquidity diminishes, investors may see lower returns, greater volatility and possibly a return to crisis. While the reasons for the decline remain uncertain, regulatory changes designed to protect investors may be a contributing factor. In clear, concise language, finance expert Douglas J. Elliot explains what market liquidity is, why it’s critical to the economy, and what market participants and regulators can do to ensure liquid and well-functioning markets. getAbstract recommends this instructive article to students, financial professionals and investors.

Summary

In the United States, financial markets provide most of the credit on which businesses and households depend, so liquidity is a critical component of healthy markets and of a sound economy. Liquidity refers to the ease with which market participants can buy or sell financial assets in a timely and cost-effective manner. Most observers agree that market liquidity, while difficult to measure empirically, appears to have declined since the onset of the 2007–2009 global financial crisis. Less liquid markets could result in higher investor costs, greater price volatility, falling...

About the Author

Douglas J. Elliott is a fellow in economic studies at the Brookings Institution.

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    S. C. 8 years ago
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