Flight-to-Liquidity

Flight-to-liquidity refers to investors moving their capital from less liquid or riskier assets to highly liquid assets, such as government bonds or cash, during periods of market stress or uncertainty. This behavior is driven by a desire to maintain easy access to funds and reduce exposure to market volatility. Flight-to-liquidity can lead to a sharp decline in the prices of illiquid assets and increased demand for liquid instruments, impacting market dynamics significantly.

Example

During the 2008 financial crisis, many investors engaged in flight-to-liquidity, selling off stocks and risky bonds in favor of U.S. Treasury securities, causing sharp price declines in less liquid markets.