Explain the valuation hierarchy that the GIPS standards recommend

Fair value is required, and GIPS recommends an order of preference for its inputs. Best is an unadjusted quoted price for the identical investment in an active market on the valuation date. Next come quoted prices for similar investments in active markets, then quoted prices for identical or similar investments in markets that are not active, then other observable market inputs such as yield curves or credit spreads. Last are subjective, unobservable inputs, used only when markets offer nothing better, as for many private investments. The further down the order a firm goes, the more judgement enters and the greater the need for documented, consistently applied policies, independent review and disclosure. Mispricing illiquid holdings can flatter returns and understate volatility.