Market Liquidity
Liquidity is context-specific: market liquidity concerns trading without excessive price impact, while funding liquidity concerns meeting obligations when due.
Liquidity has multiple meanings. Market liquidity describes the ability to transact in size without excessive delay, spread, or price impact. Funding or balance-sheet liquidity describes the ability to meet cash obligations when due. Neither form is guaranteed, and both can deteriorate rapidly under stress.
Frequently Asked Questions
Does high trading volume guarantee market liquidity?
No. Volume does not fully describe bid-ask spreads, order-book depth, concentration, volatility, market impact, or the ability to trade during stressed conditions.
Can a liquid asset always be sold at a fair price?
No. Execution price depends on size, urgency, venue, order type, volatility, counterparties, and available depth. Liquidity can vanish or become expensive during market stress.
How is funding liquidity assessed?
Common inputs include cash, committed facilities, asset convertibility, liability maturities, collateral, covenants, currency needs, and projected cash flows. A single current ratio or working-capital figure is not sufficient.
Are market liquidity and funding liquidity related?
Yes. A funding shortfall may force asset sales, while falling market liquidity can make those sales more costly. The interaction can amplify stress.