What Is a Liquidity Premium?

Liquidity premium (Liquidity) refers to the time and cost required to convert an investment asset into cash. Converting an asset to cash at a near-market price in a short period of time claims that the asset is highly liquid. "Liquidity premium" generally refers to bonds. Liquidity risk refers to the risk that bonds cannot be realised at a reasonable price in the short term.

Liquidity premium

Correspondingly, if an asset is to be converted into cash in a short period of time, it must be sold (purchased) at a price far lower (higher) than its market price, then said

That is, whether the transaction can be executed immediately in time. Since the securities market is a market, its level of liquidity must first manifest as

Means the transaction price deviates from the market

That is, the volume absorbed without affecting the current price. A market has both speed (immediateness) and low cost (width). At the same time, there is a limit in quantity, that is, a large number of transactions can be conducted quickly and at a reasonable price.

That is, the speed of recovering the equilibrium price after the price deviates from the equilibrium level due to a certain number of transactions. In a highly liquid market measured by elasticity, prices will immediately return to effective levels. In other words, when the price changes due to temporary order imbalances, new orders enter immediately, and the market is flexible; when the order flow adjusts slowly to price changes, the market lacks flexibility.

Market liquidity can be measured by the above four basic elements. Among these four factors, the market immediacy characterizes the price change, the number of orders and the time factor, the market width (transaction cost) characterizes the characteristics of the price change, the market depth (number of transactions) characterizes the characteristics of the number of transactions or orders, and market elasticity. Characterizes the relationship between price fluctuations and time. However, it must be pointed out that these four indicators may conflict with each other when measuring liquidity. For example, depth and width are usually a contradiction. The greater the depth, the smaller the width (the bid-ask spread). The larger the width, the smaller the depth. Immediateness and price are also a contradiction. It will no doubt sacrifice for patiently waiting for a better price Immediacy