AQR Asset Management Institute explores liquidity dynamics

AQR Asset Management Institute at London Business School explores how market liquidity dynamics impact investors and policymakers at its annual Perspectives event

AQR Perspectives

Leading investment and academic figures convened yesterday to discuss market liquidity and key issues facing global investors at London Business School’s AQR Asset Management Institute annual Perspectives event.

The keynote speech on the theme of missing regimes for financial stability, was delivered by Sir Paul Tucker, Chair of the Systemic Risk Council, Fellow at Harvard Kennedy School and former Bank of England Deputy Governor. In addition to Sir Tucker, senior market participants and leading academics discussed and debated issues and challenges associated with market liquidity, a key ingredient to the proper functioning of global markets. The sessions were moderated by Hélène Rey, Professor of Economics and Academic Director at AQR Asset Management Institute, London Business School.

These included:
- Darrell Duffie, Dean Witter Distinguished Professor of Finance, Stanford Graduate School of Business on why major dealers have been supplying less liquidity to over-the-counter markets.
- Hyun Song Shin, Economic Adviser and Head of Research, Bank for International Settlements on the reasons why well-capitalised banks are critically important to robust and sustainable market liquidity.
 - Rick Lacaille, Global Chief Investment Officer, State Street Global Advisors on the emergence of a new global financial system resulting from recent regulatory changes and technological innovation and the implications of the changes for market structure, stability, and liquidity.

In addition, Lasse Pedersen, Principal, AQR and Professor of Finance, Copenhagen Business School and NYU Stern School of Business, addressed the audience in a speech entitled: “Liquidity in Efficiently Inefficient Markets.” He discussed how markets are efficiently inefficient whereby competition among investors drives markets to be almost efficient, but certain inefficiencies remain for investors such as receiving compensation for providing liquidity and taking the associated risk. 

Stephen Schaefer, Professor of Finance and Deputy Dean (Faculty), London Business School, said in his closing remarks: “Liquidity is critical to a well-functioning financial system and important to all market participants, reflected in the level of interest we have seen today for this event. While the issue of liquidity has received greater attention post the financial crisis, and progress has been made on the measurement of liquidity, the mechanisms that lead to major liquidity fluctuations are complex. 

“We have learned much from the speakers today and it is clear that asset managers will need to continue to pay close attention to these issues in terms of portfolio construction, risk management and trading to address the challenge.”

David Kabiller, Co-Founder of AQR, commented: “The event generated high level discussions from leading academics and practitioners on the critical issue of liquidity dynamics in today’s market. The goal of the AQR Asset Management Institute is to drive high calibre debate that has a lasting impact on issues relevant to the asset management industry. We are pleased that the Perspectives event met that broader goal.”

Founded in January 2015, the Institute promotes excellence in asset management, through a combination of research, funding, and awards schemes intended to further the sector’s ability to preserve and generate long-term wealth and economic wellbeing for individuals and societies. 

The Institute’s next summit will be a conference in London on 1-2 November 2016.