Contributor(s): Professor Jiang Wang | Liquidity is of critical importance to the stability and the efficiency of financial markets. Shortages of liquidity has often been blamed for exacerbating and sustaining financial market crises such as the 1987 stock market crash and the 1998 near collapse of the Long Term Capital Management. Yet there is little consensus about exactly what liquidity is, what determines it, how it affects asset prices and welfare. Views become even more divergent when it comes to appropriate regulations and policies with respect to market liquidity, such as lowering barriers of entry in securities trading, increasing margins and capital requirements of broker-dealers when dealing with hedge funds, coordinating market participants and injecting liquidity during crises. Professor Wang will attempt to present a simple model of market liquidity, which will help consider these issues. In particular, it will help understand what gives rise to the need for liquidity and determines its supply, how liquidity influences asset prices and welfare, and what, if any, policies may help to achieve efficient liquidity supply in the market.