Flight-to-liquidity

A flight-to-liquidity is a financial market phenomenon occurring when investors sell what they perceive to be less liquid or higher risk investments, and purchase more liquid investments instead, such as US Treasuries. Usually, flight-to-liquidity quickly results in panic leading to a crisis.

For example, after the Russian government defaulted on its government bonds (GKOs) in 1998 many investors sold European and Japanese government bonds and purchased on-the-run US Treasuries instead. (The most recently issued treasuries, known as “on-the-run”, have larger trading volumes, that is more liquidity, than treasury issues that have been superseded, known as “off-the run”.)This widened the spread between off-the-run and on-the-run US Treasuries, which ultimately led to the 1998 collapse of the Long-Term Capital Management hedge fund. [ [http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp LTCM case study] ]

ee also

* Financial contagion
* Financial crisis
* Flight-to-quality
* Safe haven
* Stock market crash

External links

* [http://www.hec.unil.ch/abeber/research/flights.pdf Flight-to-Quality or Flight-to-Liquidity?]
* [http://ideas.repec.org/p/nbr/nberwo/9312.html The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices]
* [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=676100 Flight to Liquidity Due to Heterogeneity in Investment Horizon]

References