Forced Liquidations, Fire Sales, and The Cost of Illiquidity: A Talk by Andrew Weisman
Institutional investors seeking diversification often build portfolios using collections of securities with widely varying characteristics. To facilitate diversification, investors rely on the “common currencies” of reported return, volatility, and correlation, and employ them as inputs to portfolio construction/ optimization models or processes. Investors using this approach are often drawn to investment opportunities that appear to exhibit diversifying properties because of their limited price discovery.
Such opportunities tend to be relatively illiquid when compared to traditional investments. Investors simply take for granted that they receive a “liquidity premium” that compensates them for the lack of liquidity. This presentation examines an intuitive, rigorous method for pricing this cost.
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Mark Shore has more than 25 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops. www.shorecapmgmt.com
Mark Shore is also an Adjunct Professor at DePaul University’s Kellstadt Graduate School of Business, where he teaches the only known accredited managed futures course in the country. He is also a Board Member of the Arditti Center for Risk Management at DePaul University.