The externality also enables strategic and speculative behaviors of liquid investors. When an unusual and unexpected event incurs losses, investors find that they do not have a good understanding about the tail outcome that they are facing and treat the risk as Knightian uncertainty.
A flight-to-liquidity refers to an abrupt shift in large capital flows towards more liquid assets. Treasury bond is less risky and more liquid than a corporate bond.
The study shows that the strategic behaviors would lead to predatory pricing, which would lead the price of risky and illiquid assets to fall further than they would if price were based on risk consideration alone.
Vayanos  models how a relationship between fund managers and clients can lead to effective risk aversion when illiquidity risk rises due to asset price volatility.
For example, a U. Liquidation of assets and withdrawals from financial market were severe, which made a risky group of borrowers have difficulties rolling over their liabilities and financing new credits. Brunnermeier and Pedersen  model margin requirement and show how volatility of asset prices tightens the requirement that lead to asset sales.
Investors use the risk-return tradeoff as one of the essential components of each investment decision, as well as to assess their portfolios as a whole. Newly adopted financial innovation meant that market participants had only a short time to formulate valuation, and did not have enough history to refer to in their risk management and hedging models.
The loan from the central bank to distressed banks would improve their outside option in bargaining. This suggests that banks tend to be seen as safe havens in periods of turmoil.
However, data shows that during the flight-to-quality episodes worsening relative position of banks compared to the very safe assets. Brunnermeier and Pedersen  propose short selling restrictions and trading halts to eliminate predatory behaviors of liquid traders.
Thus less efficient asset sales would not be necessary and liquid banks would not be able to behave monopolistically. Mechanism[ edit ] Flight-to-quality episodes are triggered by unusual and unexpected events.
Krishnamurthy compares on-the-run and off-the-run treasury bonds to find higher spreads on off-the —run bonds are associated with higher spread between commercial paper and Treasury bonds.
An increase in leverage and credit spread on all but the safest and most liquid assets may incur a sudden dry up in risky asset markets, which may lead to real effects on the economy.
Longstaff  finds a spread between Resolution Funding Corporation bonds, whose liabilities are guaranteed by Treasury, and US Treasury bonds increases when consumer confidence drops, money market mutual funds and Treasury buy backs increase.
Within an all-equity portfolio, risk and reward can be increased by concentrating investments in specific sectors or by taking on single positions that represent a large percentage of holdings.
For instance, a guarantee issuance by government or loans to distressed private sectors would sustain deteriorating asset prices, bring confidence back in financial market, and prevent fire sale of assets. Gertler and Gilchrist  find similar result of relative proportion of loans being increased to larger firms, and Oliner and Rudebusch  find new loans made to safer projects are countercyclical during flight-to-quality episodes.
Measuring Singular Risk in Context and Portfolio Risk Level When an investor considers high-risk-high-return investments, the investor can apply the risk-return tradeoff to the vehicle on a singular basis as well as within the context of the portfolio as a whole.
Beber et al  make explicit distinction between flight-to-quality and flight-to-liquidity and find relative importance of liquidity over credit quality rises during flight-to-quality episodes. Examples of high-risk-high return investments include options, penny stocks and leveraged exchange-traded funds ETFs.
They only take conservative approaches, investing on only safe and uncontingent claims, to protect themselves from worst-case scenarios related to the risk that they do not understand, which further deteriorates asset prices and financial market.
Flight-to-quality is also observable within a safe group of assets. Banks, Trading and Available-for-Sale Securities), Non-Liquid Assets (mainly Other Financial Assets Designated at Fair Value, Held-to-Maturity Investments and Gross Loans) and the interest-earning components of Other Assets.
Good technical analysis of a company's trends and financials could help an investor earn better returns than the market. b. Each common stock has an expected return equal to that of the overall market. As on 30th June,there were scheduled banks in India having a total network of 64, branches.
The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. LITERATURE REVIEW OF STOCK MARKET Although common, the term stock market is somehow abstract for the mechanism that enables the trading of company stocks.
It is also used to the banks. Because these men also traded with debts, they could be called the first brokers. Review of literature A review of studies conducted for various markets in the world reveals that researchers have used a number of methodologies to analysis the CAPM.
Some studies have supported the validity of CAPM. capital and the conversion into common stock. The liquidity regulation would force banks to change the business behavior of borrowing low-cost short-term funds and investing in long-term risky assets with high returns.Literature review on risk and return analysis on common stock of commercail banks