Liquidity Black Holes

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_persaud_avinash_(2003).gif" width="136" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Liquidity Black Holes</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap4"> <area href="../main/ratings.htm" shape="rect" coords="72, 0, 163, 33"> </map> <img border="0" src="../images_title/persau63.gif" usemap="#FPMap4" width="173" height="175"></td> <td class="book_details" height="112" align="center" width="50%" rowspan="7"> <map name="FPMap3"> <area target="_top" href="../link_topic/best_of_2004.htm" shape="rect" coords="0, 0, 124, 108"> </map> <img border="0" src="../images/best_of_award_2004.gif" usemap="#FPMap3" width="125" height="109"></td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">Liquidity is one of those concepts that means different things to different people. It is extremely difficult to even come up with a unifying definition. While there are numerous books available on market risk and credit risk, shelves are largely bare when it comes to liquidity risk. That fact alone makes this edited collection noteworthy.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table7"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">Fifteen authors have collaborated in writing fourteen chapters. These explore various topics related to market liquidity, but some general themes appear across chapters. One of these is the concept of liquidity black holes. This was first introduced by the book's editor, Avinash Persaud, in 2001. Simply, a liquidity black hole is a situation where liquidity dries up, and a decline (or increase) in prices brings out more sellers (or buyers), further exasperating the price move. This is the exact opposite of what would be expected in a regularly functioning market, where, say, a price decline would bring out bargain hunters. Perhaps the classic example of a liquidity black hole is the 1987 stock market crash.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Another theme is the notion that diminished market diversity—in terms of participant knowledge, goals, or regulatory constraints—can create a "herd mentality" where all institutions respond to events in a similar manner. A particular concern in this regard is the hypothesis that VaR-based risk limits can increase liquidity risk. If all market participants use them, so the hypothesis predicts, then all market participants will tend to unwind similar positions during periods of heightened volatility.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">There are empirical chapters assessing liquidity from market data. One chapter offers an excellent account of the Asian flu and the LTCM crisis in the late 1990s. Regulatory issues are explored. Most of the chapters that consider specific markets focus on foreign exchange, fixed income or equities.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">The book is mostly non-technical, but some fairly technical math makes a brief appearance or two. I don't think this will slow down even non-technical readers.</strong></p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">Foreword </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">Liquidity Black Holes: An Introduction </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10"><b>Section 1: The Background to Market Liquidity: Introduction </b></p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">1. Liquidity in the Foreign Exchange Market: An Investment Manager's Perspective </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">2. Liquidity in the Equity Market: A Portfolio Trader's Perspective </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">3. Liquidity in the Fixed-Income Market and the Impact of EMU </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">4. Liquidity from a Central Banker's Perspective </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10"><b>Section 2: Liquidity Black Holes </b> </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">5. Liquidity Black Holes </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">6. LTCM and the Asian Financial Crisis: Liquidity Black Holes </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">7. Measuring Liquidity Black Holes </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">8. Liquidity Black Holes: Testing Theory's Predictions </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10"><b>Section 3: Liquidity Black Holes and Institutional Behavior </b></p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">9. Liquidity and News </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">10. Volatility in the Foreign Exchange Market and Disclosure of Central Bank Reserves </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">11. Market Liquidity and Risk Management </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">12. Financial System Liquidity and Credit Risk Transfers </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10"><b>Section 4: Liquidity and Architecture of the Financial System </b></p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">13. Market Distress and Vanishing Liquidity: Anatomy and Policy Options </p> <p class="contents_expanded" style="margin-top: 10; margin-bottom: 10">14. Beauty Contests, Liquidity and the New International Financial Architecture </td> </tr> </table> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">This book reminds me of the first books published on operational risk during the late 1990s. The subject it confronts is so enormous and multi-faceted, it is hard to know where to begin. Yet the authors dive right in, and they do an excellent job—defining what can be defined, clarifying issues, and identifying the state of our current knowledge. At points, authors take controversial positions. For an emerging field of study, this is probably a good thing. </strong></p> <p align="left" class="body"><strong style="font-weight: 400">Chapters are scholarly (for the most part) and highly informative. References are cited extensively. Overall, the book is an excellent and needed addition to the financial literature. I recommend it to researchers, risk managers, and regulators.</strong></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table11"> <tr> <td width="100%" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_general.htm">Risk Management - General</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_liquidity_risk.htm">Risk Management - Liquidity Risk</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_market_risk.htm">Risk Management - Market Risk</a><p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_regulation.htm">Other Functions - Regulation</a></td> </tr> </table> </td> </tr> </table> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>