Fragility due to destabilizing margins

The figure shows the equilibrium price as a function of the speculators' wealth shock η₁ (panel A) and of fundamental shocks |${\Delta }v_{1}$| (panel B). This is drawn for the equilibrium with the highest market liquidity (light line) and the equilibrium with the lowest market liquidity (dark line). The margins are destabilizing since financiers are uninformed and fundamentals exhibit volatility clustering. The equilibrium prices are discontinuous, which reflects fragility in liquidity since a small shock can lead to a disproportionately large price effect.