credit worthiness. For instance, banks may become concerned about their future access to capital markets in the event of a negative shock and may engage in precautionary hoarding of funds. This would result in reduction of funds available in the economy and a slowdown in economic activity. Additionally, the fact that most financial institutions are simultaneously engaged in lending and borrowing can give rise to a network effect. In a setting that involves multiple parties, a gridlock can occur when concerns about counterparty credit risk result in failure to cancel out offsetting positions. Each party then has to hold additional funds to protect itself against the risks that are not netted out, reducing liquidity in the market. These mechanisms may explain the 'gridlock' observed in the interbank lending market during the recent subprime crisis, when banks were unwilling to lend to each other and instead hoarded their reserves. Besides, a liquidity crisis may even result due to uncertainty associated with market activities. Typically, market participants jump on the financial innovation bandwagon, often before they can fully apprehend the risks associated with new financial assets. Unexpected behaviour of such new financial assets can lead to market participants disengaging from risks they don't understand and investing in more liquid or familiar assets. This can be described as the information amplification mechanism. In the subprime mortgage crisis, rapid endorsement and later abandonment of complicated structured finance products such as collateralized debt obligations, mortgage-backed securities, etc. played a pivotal role in amplifying the effects of a drop in property prices. Liquidity crises and asset prices Many asset prices drop significantly during liquidity crises. Hence, asset prices are subject to liquidity risk and risk-averse investors naturally require higher expected return as compensation for this risk. The liquidity-adjusted CAPM pricing model therefore states that, the higher an asset's market-liquidity risk, the higher its required return. Liquidity crises such as the financial crisis of 2007–2008 and the LTCM crisis of 1998 also result in deviations from the Law of one price, meaning that almost identical securities trade at different prices. This happens when investors are financially constrained and liquidity spirals affect more securities that are difficult to borrow against. Hence, a security's margin requirement can affect its value. Liquidity crunch and flight to liquidity A phenomenon frequently observed during liquidity crises is flight to liquidity as investors exit illiquid investments and turn to secondary markets in pursuit