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Marking to Market, Liquidity, and Financial Stability

Author

Listed:
  • Guillaume Plantin

    (Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh])

  • Haresh Sapra

    (University of Chicago)

  • Hyun Song Shin

    (Princeton University)

Abstract

This paper explores the financial stability implications of mark-to market accounting, in particular its tendency to amplify financial cycles and the "reach for yield". Market prices play a dual role. Not only do they serve as a signal of the underlying fundamentals and the actions taken by market participants, they also serve a certification role and thereby influence these actions. When actions affect prices, and prices affect actions, the loop thus created can generate amplified responses - both in creating bubble-like booms in asset prices, and also in magnifying distress episodes in downturns.

Suggested Citation

  • Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2005. "Marking to Market, Liquidity, and Financial Stability," Working Papers hal-03459036, HAL.
    • Handle: RePEc:hal:wpaper:hal-03459036
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03459036
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    References listed on IDEAS

    as
    1. Isabel Schnabel & Hyun Song Shin, 2004. "Liquidity and Contagion: The Crisis of 1763," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 929-968, December.
    2. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    3. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, April.
    4. Jackson, Patricia & Perraudin, William & Saporta, Victoria, 2002. "Regulatory and "economic" solvency standards for internationally active banks," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 953-976, May.
    5. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-968, October.
    6. George Sheldon & Martin Maurer, 1998. "Interbank Lending and Systemic Risk: An Empirical Analysis for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 685-704, December.
    7. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking‐to‐Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 435-460, May.
    8. Morris, Stephen & Shin, Hyun Song, 1999. "Risk Management with Interdependent Choice," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(3), pages 52-62, Autumn.
    9. C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements.
    10. Craig H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," Proceedings 633, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Daniel Pérez & Vicente Salas-Fumás & Jesús Saurina, 2011. "Do dynamic provisions reduce income smoothing using loan Loss provisions?," Working Papers 1118, Banco de España.
    2. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
    3. Dairo Estrada & Daniel Osorio, 2006. "A Market Risk Approach to Liquidity Risk and Financial Contagion," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 24(50), pages 242-271, June.
    4. Beltratti, Andrea & Spear, Nasser & Szabo, Mark Daniel, 2013. "The Value Relevance and Timeliness of Write-downs During the Financial Crisis of 2007–2009," The International Journal of Accounting, Elsevier, vol. 48(4), pages 467-494.
    5. Vestergaard, Jakob, 2009. "More heat than light: On the regulation of international finance," economic sociology. perspectives and conversations, Max Planck Institute for the Study of Societies, vol. 10(2), pages 6-10.

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    More about this item

    Keywords

    Marking to Market; Accounting Regime; Monetary Policy; Financial Stability;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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