By Gordon Pepper, Michael Oliver
Expert traders are bombarded on an afternoon to day foundation with assertions concerning the position liquidity is taking part in and should play in deciding upon costs within the monetary markets. Few, if any, of the companies or recipients of such recommendation can really declare to appreciate the well–springs of such liquidity and the transmission mechanisms in which it affects asset costs.
This groundbreaking new booklet explores the assumption that on the center of liquidity there's a strength which exerts contributors to influence a monetary transaction once they wouldn't in a different way do so. figuring out this strength of compulsion is a key to figuring out a monetary industry while it seems that to be behaving irrationally. This booklet will permit new and professional traders to boost an figuring out of the standards, in order that high priced blunders should be refrained from with no the lesson of expertise.
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Additional info for The Liquidity Theory of Asset Prices (The Wiley Finance Series)
Sample text
If people were content with the size of their previous holding of the asset that has risen in quantity, they will not be content with the size of their new holding. They will switch out of it into other assets to restore their portfolios to balance. Relative prices will alter as a result until a new equilibrium is reached. In the case of money, switching out of bank deposits into other assets will tend to increase the price of the other assets. In Tobin’s analysis, the link between the money supply and asset prices is explicit.
When unexpected bad news occurs and prices fall, term and adverse consequences become unacceptable. Short-term expectations are different from short-sighted ones. Discounting Liquidity Transactions 27 these investors are likely to hunt for bargains. If they do so, anyone who has sold stocks will make a loss as prices bounce back up. An excellent example of what can happen occurred in the second half of the 1990s, when Mr Tony Dye was Chief Investment Officer of P&D Fund Managers. At the time, the firm was one of the four largest fund managers in the UK.
The trading account gives details of the corporation’s income, expenditure and profit or loss during the corporation’s financial year. The balance sheet gives details of its assets and liabilities at the end of the year. The cash-flow statement reconciles the changes in the balance sheet between the start and the end of the year. Managers of small businesses, who may never produce a trading account or a balance sheet, understand the vital need to watch their cash flow. Individuals with bank accounts normally have a bank balance below which they are unhappy and have to take action, either by curtailing expenditure or selling something.
