View source for Finance:Flight-to-liquidity

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A '''flight-to-liquidity''' is a financial market phenomenon occurring when investors sell what they perceive to be less [[Finance:Liquidity|liquid]] or higher [[Risk|risk]] investments, and purchase more liquid investments instead, such as US Treasuries. Usually, flight-to-liquidity quickly results in panic leading to a crisis.

For example, after the {{wipe|Russia}}n government [[Finance:Default|defaulted]] on its government bonds (GKOs) in 1998 many investors sold European and Japanese government bonds and purchased on-the-run US Treasuries instead. 
(The most recently issued treasuries, known as “on-the-run”, have larger trading volumes, that is more liquidity, than treasury issues that have been superseded, known as “off-the run”.)
This widened the spread between off-the-run and on-the-run US Treasuries, which ultimately led to the 1998 collapse of the [[Company:Long-Term Capital Management|Long-Term Capital Management]] hedge fund.<ref>[http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp LTCM case study] {{webarchive|url=https://web.archive.org/web/20110718024059/http://www.erisk.com/Learning/CaseStudies/Long-TermCapitalManagemen.asp |date=2011-07-18 }}</ref>

==See also==
* [[Finance:Financial contagion|Financial contagion]]
* [[Finance:Financial crisis|Financial crisis]]
* [[Finance:Flight-to-quality|Flight-to-quality]]
* [[Finance:Stock market crash|Stock market crash]]

==References==
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==External links==
* [http://ideas.repec.org/p/nbr/nberwo/9312.html The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices]
* [https://ssrn.com/abstract=676100 Flight to Liquidity Due to Heterogeneity in Investment Horizon]

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[[Category:Financial markets]]


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