Mark-to-market accounting and liquidity pricing
AbstractWhen liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions' solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks' assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Accounting and Economics.
Volume (Year): 45 (2008)
Issue (Month): 2-3 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jae
Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franklin Allen & Douglas Gale, 2005. "From Cash-in-the-Market Pricing to Financial Fragility," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 535-546, 04/05.
- Allen, Franklin & Carletti, Elena, 2005.
"Credit risk transfer and contagion,"
CFS Working Paper Series
2005/25, Center for Financial Studies (CFS).
- Guillaume Plantin & Haresh Sapra & Hyun Shin, .
"Marking to Market: Panacea or Pandora’s Box ?,"
GSIA Working Papers
2005-E4, Carnegie Mellon University, Tepper School of Business.
- Bagehot, Walter, 1873. "Lombard Street: A Description of the Money Market," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number bagehot1873.
- Xavier Freixas & Dimitrios P. Tsomocos, 2004.
"Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing,"
OFRC Working Papers Series
2004fe13, Oxford Financial Research Centre.
- Dimitrios P Tsomocos & Xavier Freixas, 2004. "Books vs. Fair Value Accounting in Banking, and Intertemporal Smoothing," Economics Series Working Papers 2004-FE-13, University of Oxford, Department of Economics.
- Xavier Freixas & Dimitrios P. Tsomocos, 2004. "Book vs. fair value accounting in banking and intertemporal smoothing," Economics Working Papers 771, Department of Economics and Business, Universitat Pompeu Fabra.
- Franklin Allen & Douglas Gale, 1976.
"Optimal Financial Crises,"
Center for Financial Institutions Working Papers
97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 2004.
"Financial Intermediaries and Markets,"
Econometric Society, vol. 72(4), pages 1023-1061, 07.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.