bonds listed on different exchanges that are otherwise identical. The risk-free rate of return is 2%. Investors hold bonds for an average of one year. A central bank acts as market-maker, supplying cash on demand for bonds. To cover its costs, the price the central bank pays is a bit below the fair value of a bond, which is the price it requires buyers to pay for it . The bid-ask spread is the cost of trading.
In our simple example, fees are the friction that makes one security costlier to trade than another. But there are other features intrinsic to the securities themselves that make them more or less liquid. The shares of big companies, such as Apple or ExxonMobil, are traded cheaply in seconds, because they are part of a big pool of identical securities. Buy and sell orders can be effortlessly matched on electronic order books. In contrast, a company may have bonds of several maturities.
Most assets are somewhat illiquid. Houses can take several months to sell. A piece of fine art might not trade for decades. Some kinds of investments, such as limited partnerships in private-equity or venture-capital funds, require capital to be locked up for several years. Secondary-market trades are rare; where they occur, they are at predatory discounts. The liquidity cost of holding such thinly traded assets cannot usefully be represented by a bid-ask spread.
Quantum entanglement - for wealthy only. Financial repression for the rest.
commitly FYI
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