DEFINITION of 'Flight To Liquidity'

A situation where investors attempt to liquidate positions in inactive or illiquid assets and purchase positions in more liquid assets. A flight to liquidity would typically take place during times of economic or market uncertainty, as investors fear that the markets may tumble they choose to seek positions in more liquid securities in order to increase their abilities to sell their positions in the case where they wish to leave the market.

BREAKING DOWN 'Flight To Liquidity'

During a flight to liquidity, investors view illiquid assets as uncertain and those illiquid assets will typically fall in their implied value due to discounts for a lack of liquidity. Investors then enter into positions in more liquid assets, such as treasuries or blue-chip stocks in order to gain flexibility and limit their overall portfolio risk. Flights to liquidity are not uncommon and may occur on a small scale on a day-to-day basis.

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