Liquidation cost: why mark-to-market values are wrong

Equity portfolios are marked-to-market on the assumption that each share will recoup that amount of cash – but exiting large positions has a market impact, wiping out value. New research indicates this dynamic may be governed by a universal law. Laurie Carver reports

JP Bouchaud

It is the kind of story old traders tell around the campfire: it starts with a big, long position in a stock, the price of which starts to slide. The trader’s reaction is to sell, and sell in size, but the market is spooked and the depreciation only accelerates. The trader is desperate to exit, selling more stock – and the price drops again – and this continues until the bottom, or bankruptcy, is reached.

The phenomenon is as old as markets themselves. According to one near-contemporary –

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