Value vs. Liquidity in times of systemic stress

Throughout the recent market instability, one topic that is constantly discussed is price discovery in markets. Public exchanges work by matching buyers and sellers, and they determine prices based on supply and demand. In this way, the price of a certain security should also represent its present "fair" value to the investor. Yet in times of financial crises, this relationship can break down due to insolvency. Bookstaber does a great job explaining this situation, and also provides some insight into the implications of "liquidity" vs. "value" pricing on the rest of the market:

Read his blog here.

Rick Bookstaber is the author of A Demon of Our Own Design, which discusses risk management in the context of financial crises. Bookstaber argues that financial innovation is inevitable, and that, although complexity is not necessarily bad for the markets, it ultimately encourages financial crises. His blog follows up on these concepts and applies it to current events in the markets.