Explanation:
A is TRUE: According to Andrew Ang, liquidity is dynamic. Even markets that are normally highly liquid (like public equities or government bonds) can periodically dry up and become highly illiquid during times of crisis or market stress.
B is FALSE: Most individuals actually hold the vast majority of their wealth in highly illiquid assets, most notably real estate (their home) and human capital.
C is FALSE: Many major asset classes are inherently illiquid (e.g., real estate, private equity, infrastructure, venture capital), meaning illiquid markets are neither small nor temporary.
D is FALSE: While technology has reduced certain trading costs, it has not virtually eliminated frictions such as search costs, asymmetric information, price impact, and funding constraints, especially in alternative and illiquid markets.
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707.1. According to Andrew Ang, illiquidity can arise due to the following market imperfections: clientele effects and participation costs, transaction costs, search frictions, asymmetric information, price impact or funding constraints. He characterizes the effects of these imperfections as "illiquidity." In regard to the CHARACTERISTICS of illiquid markets, based on Ang's research, which of the following statements is TRUE (such that the other statements are generally false)?
A
Normally liquid markets periodically become illiquid
B
Most individuals hold the majority of their wealth in liquid or highly liquid assets
C
Most asset classes are liquid such that genuinely illiquid markets tend to be small and temporary
D
Technology has virtually eliminated the following frictions: transaction costs, search friction, asymmetric information, price impact, and funding constraints
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