Re:Why Index Funds Are Like Subprime CDOs
by nickles on Thursday September 05, 2019 @03:47PM
(#20890087)
> An illiquid asset cannot be liquidated without slippage - that's why there's a liquidity premium.
We agree here.
> Those are the same thing.
We disagree here.
"In economics, a liquidity premium is the explanation for a difference between two types of financial securities (e.g. stocks), that have all the same qualities except liquidity." [0]
"With regard to futures contracts as well as other financial instruments, slippage is the difference between where the computer signaled the entry and exit for a trade and where actual clients, with actual money, entered and exited the market using the computer’s signals."
The concepts are related, but not identical.
Those are the same thing. An illiquid asset cannot be liquidated without slippage - that's why there's a liquidity premium.
> When running an ETF arbitrage strategy, your concern is not explaining the price of the relevant securities. However, you do care whether you can enter and exit positions profitably. Slippage models are highly nontrivial.
Again...slippage is the thing caused by a lack of liquidity.