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The Liquidity Theory of Asset Prices

The Liquidity Theory of Asset Prices

Gordon Pepper, Michael Oliver

ISBN: 978-1-118-67342-3

Jul 2013

192 pages

Description

Professional investors are bombarded on a day to day basis with assertions about the role liquidity is playing and will play in determining prices in the financial markets. Few, if any, of the providers or recipients of such advice can truly claim to understand the well–springs of such liquidity and the transmission mechanisms through which it impacts asset prices.

This groundbreaking new book explores the belief that at the core of liquidity there is a force which exerts individuals to effect a financial transaction when they would not otherwise do so.  Understanding this force of compulsion is a key to understanding a financial market when it appears to be behaving irrationally. This book will enable new and seasoned investors to develop an understanding of the factors, so that costly mistakes can be avoided without the lesson of experience.

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Foreword by Russell Napier xiii

Acknowledgements xvii

About the Authors xix

List of Tables, Figures and Charts xxiii

Introduction 1

Appetiser 1

Structure of the book 2

Language and jargon 2

Academic theories 3

Modern Portfolio Theory 3

The Efficient Markets Hypothesis 4

Forms of investment analysis 4

Fundamental analysis 4

Monetary analysis 5

Technical analysis 5

The intuitive approach 6

What the book is going to say 6

PART I THE LIQUIDITY THEORY 9

1 Types of Trades in Securities 11

2 Persistent Liquidity Trades 15

3 Extrapolative Expectations 21

4 Discounting Liquidity Transactions 25

5 Cyclical Changes Associated with Business Cycles 37

6 Shifts in the Savings Demand for Money 43

PART II FINANCIAL BUBBLES AND DEBT DEFLATION 49

7 Financial Bubbles 51

8 Debt Deflation 55

PART III ELABORATION 59

9 Creation of Printing-press Money 61

10 Control of Fountain-pen Money and the Counterparts of Broad Money 65

11 Modern Portfolio Theory and the Nature of Risk 71

12 Technical Analysis and Crowds 81

13 The Intuitive Approach to Asset Prices 87

14 Forms of Analysis 93

PART IV EVIDENCE AND PRACTICAL EXAMPLES 101

15 The UK Markets Prior to 1972 103

16 The US Equity Market 1960–2002 109

17 Two Forecasts 113

18 Debt Deflation, Practical Experience 119

PART V MONITORING DATA 121

19 Monitoring Current Data for the Monetary Aggregates 123

20 Monitoring Data for the Supply of Money 139

21 The Different Sectors of the Economy 145

Glossary 149

References 157

Index 159