1
$\begingroup$

I encountered this phrase in the textbook by Hans Schumacher

For the purposes of this textbook, a mathematical model for a financial market consists of a specification of the joint evolution of prices of a number of given assets. Further information that may be important in practice, such as trading restrictions, are abstracted away by the assumption of perfect liquidity.

Could anyone explain how assuming perfect liquidity would resolve issues like trading restrictions?

Improve this question
$\endgroup$
2

1 Answer 1

Reset to default
5
$\begingroup$

A trading restriction could mean that you cannot short certain instruments, or that you cannot execute above/below certain volumes. For example in practice you cannot trade fractional numbers of a stock, let alone irrational numbers. Perfect liquidity basically means none of these restrictions exist, it is an idealization to facilitate modelling.

Improve this answer
$\endgroup$

Not the answer you're looking for? Browse other questions tagged or ask your own question.