Newer capital markets are less volatile because they are less liquid. True or False?

Question

Newer capital markets are less volatile because they are less liquid.  True or False?

BlackTom AI · Accepted Answer

The question asks whether newer capital markets are less volatile because they are less liquid. 
Option 1: True. This claim is not accurate. In practice, lower liquidity tends to amplify price moves and increase volatility, not reduce it, especially in times of stress, because fewer participants and tighter bid-ask spreads can cause larger price jumps. 
Option 2: False. The statement as written makes a causal claim that weaker liquidity reduces volatility, which contradicts typical market dynamics where illiquidity often magnifies volatility. Higher liquidity generally dampens short-term price swings by providing more counterparties and tighter spreads, whereas reduced liquidity can lead to greater volatility as trades have a bigger impact on prices. 
Framing this differently, liquidity and volatility are related but inversely correlated in many scenarios: more liquid markets usually exhibit lower short-term volatility due to smoother price discovery, while less liquid markets can experience outsized moves for relatively small trades. Thus, the assertion that newer markets are less volatile due to being less liquid misstates the relationship between liquidity and volatility. 
To summarize the common-sense relationship: if liquidity improves, volatility tends to decrease; if liquidity deteriorates, volatility tends to increase. Therefore, the statement in option 1 is misleading, and option 2 correctly identifies the flaw in that reasoning.

BUSFIN 4236 SP2025 (5326) Capital Markets - FINAL EXAM- Requires Respondus LockDown Browser

Newer capital markets are less volatile because they are less liquid. True or False?

View Explanation

Log in for full answers

Similar Questions

An important function of secondary markets is to

In contrast to public markets, private markets are characterized by individually negotiated transactions that take place without the aid of a centralized market. Therefore, private markets will generally have:

Which of the following is NOT a correct description of the four dimensions of liquidity:

Which of the following contributes MOST to the marketability of a security?

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler