Abstract
M.Com. (Finance and Investment Management)
The latest financial crisis that began in 2007 in the USA and spread to Europe, Africa and
other continents has highlighted the importance of liquidity and its role in financial markets.
One of the most commonly accepted mathematical models used in financial markets is the
Black and Scholes option pricing model (BSM model). The assumptions in the BSM model
have again been questioned during the current crisis and, in particular, the assumption of an
unending risk-free supply of liquidity. This report reviews this assumption in the South
African financial markets with local market participants. These views are polled through the
use of a questionnaire to gauge these participants' views on liquidity using proxies or factors
that impact overall liquidity. The results showed significantly different perspectives
depending on the role of the participant as either market maker or price taker. The overall
liquidity proxies used showed that local market participants believe these proxies impact
liquidity. The view that liquidity is an unending commodity and thus priced as riskless was
disputed by local market participants. The practical significance of the research problem in
the local context should provide local participants with some insight into local perceptions on
liquidity that may provide some practical tools when pricing or trading instruments in the local market.