What happens if investors refuse to invest in asset markets in which liquidity can disappear and where there is excessive price volatility?

- "The financial crisis has definitely discouraged investors from allocating large portions of their portfolios to:
• financial asset markets in which liquidity can disappear;
• asset markets where equilibrium prices show excessive volatility."
- "Many investors have liquidity requirements and fair value accounting ("mark to market") penalises assets for which price volatility is excessive. The problem is that most financial assets come under these two categories: equities, credit, emerging-market assets, commodities, ABS, even covered bonds, public debts of small countries, and bank debt."
- "The only liquid assets left, with fairly stable prices, are US, French and German government debt, hence the relatively high price of these assets."
Natixis Flash Economics 349 20100706

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