This increase in market liquidity in recent years seems to reflect partly, if not mostly, structural changes, for example, the liberalisation of international flows of funds, the securitisation of loans, the development of new financial instruments, and the rapidly growing presence of highly active financial market participants in markets, such as hedge funds.
However, ample market liquidity could also reflect the “search for yield” and excessive risk appetite, indicating that liquidity risk could be underpriced. If this is soothe case, the current favourable market liquidity conditions could suddenly fade away if there were an abrupt and lasting increase in risk aversion.