As I have discussed in prior remarks, “liquidity” in the sense of “trading liquidity” reflects the ability to transact quickly without exerting a material effect on prices. Underlying this concept is the fact that although the many buyers and sellers have different views on the most likely outcomes, the distributions of possible outcomes for which they demand risk-based compensation can be quantified.
Liquidity exists when investors are confident and willing to take risks. Liquidity, then, can be viewed as confidence on the part of buyers and sellers of securities. By disaggregating a security into its constituent risk components, financial innovation can unlock this liquidity. Strong global economic performance provides another important support for the high liquidity and levels of confidence in today’s capital markets.