The versatility of the concept of asset liquidity (asset liquidity as a reflection of the quality of market functioning) - Investments

The versatility of the concept of asset liquidity (asset liquidity as a reflection of the quality of the functioning of the market)

The liquidity of an asset in general terms means the possibility (more accurately, the probability, and therefore, liquidity is inextricably linked with the risk) of the transformation of this asset into cash in a relatively short period and without a significant loss of value (it is a fair value). Another definition of the liquidity of an asset from the position of an investor, which is traditionally given in microstructural finance, is the probability of making a transaction for an asset (purchase/sale) of the assigned amount at a fixed price and for a set time. This definition emphasizes that the investor is interested in the question: can he make a deal immediately, without additional costs and without adverse impact on the equilibrium market price of this asset? To answer this question, the investor should take into account the market of these assets (how much it is developed, available for making transactions).

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Technically, analysts assess the liquidity of the market on five projections (investors talk about measuring the liquidity of the asset market in five dimensions):

1. Density ( tightness ). It is fixed, what will be the overpayment of the investor when buying the asset and underpayment in the sale. The smaller the deviation, the higher the liquidity of the asset. For quoted assets (stocks, bonds), the deviation of the offer price of the asset (ask) or the demand price for the asset (bid) from the equilibrium price is calculated.

2. The frequency of the transaction/immediacy (trading frequency/immediacy ), i.e. how long the investor has to wait for the appearance of a counterparty for the transaction (for example, a trader who wants to sell/buy an asset). Liquidity is the higher, the shorter the waiting time.

3. The breadth/width of the market for this asset. Is it sufficient in the asset market to conclude the desired deal completely. It is determined by the amount of the asset that the counterparty can offer for sale (or accepted by the counterparty for purchase).

The greater the quantity of an asset on the market, the higher the liquidity of this asset.

4. The depth, , or the market capacity of the asset at the current time. The investor should consider how many counterparties are present on the market (exchange) simultaneously with the counterparties offering the best selling/buying price (their deal will take place first), and whether other market participants will have the opportunity to conclude deals immediately after the counterparty with the best the offer will leave the market, concluding the deal. The more counterparties, the higher the liquidity.

In the practice of exchange trades, the depth and breadth of the market is estimated from the book of limited bids (in the professional language - on the "exchange cup"). A limited order is a bid for purchase or sale (as opposed to a market order, when transactions occur immediately when an investor wishes to buy or sell an asset), limited in price (ie, with a price condition). Note that both the depth and breadth of the market vary both by day and by day. An interesting research task is to reveal the regularity in the behavior of liquidity projections during the day (for example, this change will be in the form of U or W ).

5. Resiliency. The investor is interested in how much the price of an asset deviates from the prevailing price under the influence of an event (for example, a big deal, a news stream related to the issuing company). In a non-liquid market (when inelasticity manifests itself), the price after some shock "freezes", unable to return to the previous equilibrium level or move to a new equilibrium level.

Example 1

Compare the two market options for an asset in terms of latitude and depth. The & quot; glass & quot; are given in Table. 11.1.

Table 11.1

Comparison of the two markets by liquidity

Prices BID (rub.)

Market 1 (pcs)

Market 2 (pcs)

77

100

250

75

25

50

70

100

64

15

Market characteristics

Thin and empty market

Wide and deep market

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Example of "stock ticker" & quot; is shown in Fig. 11.1 (MICEX Stock Exchange) for over-the-counter shares "Abrau-Durso & quot; on April 22, 2013 Bid-ask the spread is equal to 80.35 - 80.05 = 0.3 rubles. Traditionally, the prices of sellers are shown in red (in Figure 11.1 - in the top left, they are shown in bold type, and the prices and volumes of exhibited securities in units (sell orders for each limited price and cumulative number of traded securities) sellers - green (lower right) .

Fig. 11.1. & quot; Stock Glass & quot;

The liquidity of an asset depends both on macroeconomic and sectoral factors (state of the economy, industry) and on the characteristics of the market (exchange) on which it addresses (number of participants, their types, transaction costs, for example, sales-related taxes, commissions exchange and brokers), as well as on the characteristics of the asset itself (price, divisibility, availability of restrictions on sales, a package offered for sale, etc.) and the issuing company (availability of information for investors, its reliability, adherence to corporate governance standards).

The less the asset is liquidated, the greater the risks the investor takes. Liquidity can be viewed as a specific risk profile, for which an investor will require a higher premium. At the same time, it is necessary to distinguish between systematic liquidity (which varies for all market assets in the event of some macroeconomic events, for example, recession or recovery) and specific (unique) liquidity, which is actually estimated by various liquidity indicators, for example Amykhud coefficient (2002). An example of a systematic liquidity risk is the drop in liquidity of most securities during the period of the market fall. This is especially evident with second-tier stocks (in fact, demand disappears, the spread of purchase and sale prices increases).

The liquidity characteristics of the asset become another significant factor distinguishing assets from investment attractiveness (along with the life of the asset, its expected return and the likelihood of obtaining this yield). Other things being equal (the projected monetary benefit, the likelihood of obtaining it based on macroeconomic and industry factors, the investment horizon), the less liquid asset will be worth less than the more liquid asset.

The simplest liquidity differences are related to the shares of public companies on the market (open joint-stock companies whose shares are quoted on the exchange) and with shares of closed companies (for example, CJSC) and shares in limited liability companies (LLCs). With the same forecast financial indicators and internal characteristics, the share in closed companies will be less appreciated by investors because of the additional costs associated with the sale of this asset. In academic literature, the concept of a discount for lack of marketability arose.

Shares in public companies also differ in terms of liquidity, which is reflected in price differences. The Moscow Stock Exchange (formerly MICEX and RTS) takes into account such a liquidity metric as the coefficient free-float , which is the limiting parameter in the calculation of stock index values ​​(for shares not present in the stock index, the coefficient free- float is not calculated). Since 2006, the Moscow Interbank Currency Exchange has been a quarterly list of the 50 most liquid securities in circulation, but it should be noted that this practice has a purely applied nature - the identification of securities whose liquidity meets the criteria set out in the FSFM order of 7 March 06, 2006 No. 06-25/pz-n "On Approval of the Regulation on the Liquidity Criteria for Securities", with a view to using them as collateral for granted loans for margin transactions.

Stock markets are also compared by analysts in terms of liquidity, which allows them to be ranked by investment attractiveness. Within one country there may be different liquidity exchanges (for example, RTS and MICEX). Sectoral differences in stock liquidity are also observed (for example, the liquidity of shares in energy and food companies, retail chains, both in the Russian Federation and in the world is high).

Because of the significant difference in approaches to assessing the minority and majority shares of weakly liquid companies in American academic literature, there are two terms: "lack of marketability discount" (DLM) for minority stakes and illiquidity discount for majority. Accordingly, the nature of discounts for low liquidity on controlling (majority) and minority stakes is different.

To assess the degree of liquidity of exchanges (see, for example, Tables 10.4 and 10.5), analysts use a number of indicators:

1) the number of registered shares on the exchange;

2) the number of calendar days with no bidding (for example, forced closing of trades is due to sudden price fluctuations);

3) the total volume of exchange trades (in physical or monetary terms) per unit of time (hour, day, month, year);

4) the share of public market companies in relation to the total number of registered companies in the country;

5) the cost of trading the asset (the availability of various taxes and fees associated with the trading of securities, the existence of legal restrictions).

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