Marking to Market, Liquidity and Financial Stability
University of Toulouse 1 - Toulouse School of Economics (TSE)
University of Chicago - Booth School of Business
Hyun Song Shin
Bank for International Settlements; Princeton University - Department of Economics
July 7, 2005
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.
Number of Pages in PDF File: 33
Keywords: Marking to market, accounting regime, monetary policy, financial stability
JEL Classification: G12, G21, G22, G28
Date posted: July 30, 2008
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