Research : Liquidity Black Holes

Anybody considering investing in preferred shares or corporate bonds should be familiar with the concept of liquidity and its effects on market prices. What happens when liquidity ceases to be merely a contributing factor and becomes dominant?

As I state in the conclusion:

As weary readers will have worked out for themselves by now, this essay does not present any magic formulae that guarantee instant success in the Canadian preferred share market – I simply felt that the concept of “Liquidity Black Holes” was interesting enough that I should pass on the information to assist readers to understand the market, and some of the academic research surrounding the market, a little better.

However, there is one salient investment truism that should be remembered: the price of investment instruments can vary, sometimes very sharply, for reasons that have absolutely nothing to do with the fundamental value of that investment – even when both buyers and sellers have identical views on how that fundamental value can be estimated.

Look for the research link!

3 Responses to “Research : Liquidity Black Holes”

  1. mbarbon says:

    Yes, following the herd can lead everyone to fall off the cliff…..

  2. […] market is used to price a large, very liquid, derivatives market (another resource is my piece on Liquidity Black Holes). Even a dominance of the pension funds in the physical market could be problematic – […]

  3. […] sure there will be more material on this liquidity black hole to follow, but for now I’ll just register my continuing disgust with the charlatans and […]

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