illiquidie

Illiquidie is a neologism used in economics and finance to describe the degree to which an asset, market, or position resists conversion to cash without substantial loss of value. The term aims to capture both structural factors such as market depth and access to capital, and transactional barriers like costs, time, and information frictions that hinder rapid sale.

Practically, illiquidie is assessed by indicators such as bid-ask spreads, trading volume and turnover, time to execute a sale, price impact of trades, and the cost of hedging or financing an exposure. Illiquidie tends to be higher in markets that are fragmented, have long settlement cycles, or feature scarce buyers and sellers, as well as in assets with opaque pricing or limited public information.

Examples of assets or markets with elevated illiquidie include private equity holdings, certain real estate or collectibles markets, small-cap stocks on thinly traded exchanges, and over-the-counter instruments with few market makers. Illiquidie can also emerge during periods of market stress when liquidity access tightens abruptly.

High illiquidie raises pricing risk, increases funding costs, and complicates risk management and portfolio diversification. It can magnify losses during downturns as liquidity constraints force larger price moves or delayed exits. Conversely, improvements in market design, transparency, and the presence of liquidity providers can reduce illiquidie over time.

Critics note that illiquidie is dynamic and horizon-dependent, and that measuring it consistently remains challenging. The term is not universally standardized, and its interpretation may vary across markets and asset classes.