· Investors will not be able to realize the true value of their investments due to a widening of the bid-ask spread and a lack of buyers or sellers.
· Estimate through bid-ask spread which is also considered be a type of transaction cost.
· Increases in extreme events or if one or more dealers leave the market.
· Instintutional investors need to mark their holdings to market (using bid price or use evaluation model if no active bids-> if illiquid, prevailing market price not true
Bid-ask spread: Highest Bid - Lowest Ask
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