Liquidity, Volatility and the Cost of Trading
Market liquidity is a useful lens for understanding bid-ask spreads, market depth and volatility. Liquidity is not constant; it deteriorates when volatility rises and when dealers reduce balance-sheet capacity. Trading costs can materially reduce returns, especially in stressed markets.
Why it matters for portfolios
Liquidity risk should be modeled as a cost and a constraint, not as a background assumption.
What to watch
spreads, market depth, trading volume and dealer inventories
This article is for educational purposes only and does not constitute investment advice.