Liquidity Crunch and Flight To Liquidity
A phenomenon frequently observed during liquidity crises is Flight to liquidity as investors exit illiquid investments and turn to secondary markets in pursuit of cash–like or easily saleable assets. Empirical evidence points towards widening price differentials, during periods of liquidity shortage, among assets that are otherwise alike, but differ in terms of their asset market liquidity. For instance, there are often large liquidity premia (in some cases as much as 10-15%) in Treasury bond prices. An example of a flight to liquidity occurred during the 1998 Russian financial crisis, when the price of Treasury bonds sharply rose relative to less liquid debt instruments. This resulted in widening of credit spreads and major losses at Long Term Capital Management and many other hedge funds.
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Famous quotes containing the word flight:
“In all her products, Nature only develops her simplest germs. One would say that it was no great stretch of invention to create birds. The hawk which now takes his flight over the top of the wood was at first, perchance, only a leaf which fluttered in its aisles. From rustling leaves she came in the course of ages to the loftier flight and clear carol of the bird.”
—Henry David Thoreau (1817–1862)