Liquidity and Marketability

What is the difference between liquidity and marketability? Is it as follows:
Liquidity - Stable Market Values
Marketability - There are many buyers and sellers

 

Is that quote from the 2009 reading also in the 2008 reading? Haven't seen it before. In the 2008 reading, it's a bit confusing because it talks about a market context of liquidity risk where a "market does not have the capacity to handle (at least, without significant adverse impact on the price) the volume of an asset to be bought or sold at the time when the deal is required".

Marketability is explained in the ActEd solution to CA1 Paper 1 April 2007 as meaning that "an asset can be quickly and easily bought and sold at the desired price and in the desired volumes."

(unfortunately, by saying 'quickly here, this seems to combine what the 2009 core reading says about marketability with what is says for liquidity.)

 

I don't understand what the distinction is.

Both appear to say that they are measures of the time taken to sell the asset for cash.

Could someone please provide an example asset which is only one of liquid/marketable - perhaps that might help?

 

Just to muddy the waters a little, the definition of marketability/liquidity in the 2009 Core Reading was not my understanding of the terms. To quote from a paper on marketability/liquidity issued by Hidetoshi Takeda of the International Monetary Fund (available at http://www.imf.org/external/np/sta/bop/pdf/resteg4.pdf):

"Further, it is worth noting that market participants may interpret "marketability" different from "liquidity", in that the former implies the ability to buy and sell the instrument with minimum time and cost, whereas the latter also implies the ability to buy and sell without unduly affecting the value of the security."

In fact, I used the above definition in my ST5 exam last session. So, I interpret the set of liquid assets to be a subset of the set of marketable assets, with the extra condition that selling doesn't unduly influence value. To be clear on this: according to this definition you cannot then have an asset which is liquid but not marketable.

The "InvestorWords" source at http://www.investorwords.com/2963/marketability.html also seems to agree with this.

Do we know what the source is for the Core Reading definition? A peer-reviewed source for this definition would be ideal.

 

marketability - ease of trading

liquidity - how close asset is to cash, i.e. volatility

so talk about trading issues when assessing marketability, and talk about how close asset is to cash by analysing its volatility when assessing liquidity (higher the volatility, further the asset is from cashing out)

 

Can nobody do this??

Tutors??

 

I think the usual answers are:

Equities are marketable, but not liquid. They can easily be traded, but do not have stable values.

Short-Term deposits are seen as liquid, but not marketable.

Some discussion is useful:
Cash is the 'ultimate' liquid asset, but is obviously not marketable. Any close substitute to cash is also liquid, even if it is not marketable.

If an asset is marketable and stable in value, then there is not much difference between holding this asset and holding cash, so this asset will be liquid.

Consider the notes on CIVs. Unit Trusts are said to guarantee marketability, not liquidity. This is because the Units can always be cashed in at short notice, but their values are not guaranteed - therefore they do not behave like cash and are not liquid.

Interesting choice of words, I think, since Units cannot be bought and sold between investors and are therefore not marketable in the usual sense. So can we really say Units in a Unit Trust are marketable, but the term deposit isn't, as we did in the example above?

This is why I tend to like the idea that liquidity = marketability + stable values, where marketability is taken in the unit-trust sense. (but can short-term bonds that cannot be bought and sold easily be considered marketable because they can be redeemed in the near future. Again a direct consequence of accepting that Units in a Unit Trust are marketable).

You could say that assets can be considered as having two features relevant to marketabiliy - ability to be traded and ability to be cashed in. One additional feature is required for liquidity and that is stability in value.

Finally, tying this in with the "closeness to cash" concept. As asset can only behave in a similar way to cash if it is marketable in at least one of the above senses, and is also stable in value.

There's a post on the ST5 forum about this, which you might want to look at.

 

Not sure if I'm convinced. If long-term bonds are marketable, i.e. if they can be traded easily, doesn't that make them liquid (can be converted to cash quickly)? If I can easily trade a long-term bond, doesn't that mean I can sell it quickly to convert to cash quickly?

 

For the solution to Sep06 Paper 1 Q6(iii) in ASET it states as one of the risks of Corporate bonds, "Corporate Bonds are generally less marketable than some assets (e.g. government bonds, equity in blue-chip companies), which may be a risk for investors who need liquid assets".

This seems to imply that these investors would prefer to hold government bonds or blue-chip equities. I would have thought these assets would be quite illiquid (especially if the bonds are long-term). Is this a case of marketability and liquidity being mixed up again or am I missing something?

 

Just to add to Anna's response: Corp bonds would be more volatile due to its smaller issue size (supply) compared to govt bonds. If the same quantity of govt and corp bonds are traded, corp bond price change would be more noticeable. So there's prive uncertainty. If you are the trader in question, you could make a loss due to
1) liquidating corp bond way too early
2) price volatiliy

It doesnt mean that 2) is always loss, it could be a profit too. But being actuaries, skeptisism is the order of the day....