Likviidsust

Likviidsust, or liquidity in Estonian, refers to the degree to which an asset or market can be converted into cash quickly and with minimal loss of value. It is a central concept in finance and economics, influencing asset pricing, risk management, and regulatory requirements. Liquidity is typically discussed in terms of market liquidity, which concerns the ease of buying or selling assets in the market, and funding liquidity, which concerns an institution’s ability to meet cash needs as they arise.

Market liquidity is shaped by market depth, trading volume, the number of participants, and the presence of market makers. Common indicators include the bid-ask spread, the price impact of trades, and turnover. Assets with high market liquidity usually have narrow spreads, substantial depth, and high turnover, whereas illiquid assets can experience large price moves from relatively small trades.

Funding liquidity refers to the ability to obtain cash to meet obligations, and is often assessed through measures such as liquidity coverage ratios (LCR) and other regulatory or internal metrics. In a broader sense, systemic or collective liquidity describes the ease with which the financial system as a whole can supply cash during stress.

Examples illustrate the concept: government bonds and large-cap stocks are typically highly liquid, while real estate or private equity can be relatively illiquid. Liquidity risk management involves monitoring liquidity buffers, funding profiles, and contingency plans to prevent or mitigate abrupt liquidity shortages in stressed conditions.