Abstract

http://ssrn.com/abstract=1507342
 
 

References (50)



 
 

Citations (5)



 


 



Where Does the Information in Mark-to-Market Come From?


Alexander Bleck


University of British Columbia - Sauder School of Business

Pingyang Gao


University of Chicago - Booth School of Business

October 17, 2011

Chicago Booth Research Paper #10-06

Abstract:     
We study the ex-ante efficiency of mark-to-market accounting (MTM) in a loan market by taking into account its real effects on banks’ origination and retention decisions. Despite its benefit of improved valuation accuracy, MTM could reduce the overall efficiency of the economy. The efficiency loss results from the central idea of the paper: the attempt to exploit the information in market price, by adopting MTM, interferes with the market process that generates the information in price. Relative to historical cost accounting, MTM could induce banks to retain excessive exposure to the risk of the loans they originated, damage price discovery in the loan market, and reduce banks’ ex-ante incentive to originate good loans. These results imply an economy with an inefficient risk distribution and a lower overall loan quality, two important factors that have contributed to the current financial crisis.

Number of Pages in PDF File: 51

Keywords: Mark-to-Market, Feedback, Liquidity, Financial Crisis, Securitization

JEL Classification: G12, G14, G20, G21, M40

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Date posted: November 18, 2009 ; Last revised: September 6, 2012

Suggested Citation

Bleck, Alexander and Gao, Pingyang, Where Does the Information in Mark-to-Market Come From? (October 17, 2011). Chicago Booth Research Paper #10-06. Available at SSRN: http://ssrn.com/abstract=1507342 or http://dx.doi.org/10.2139/ssrn.1507342

Contact Information

Alexander Bleck (Contact Author)
University of British Columbia - Sauder School of Business ( email )
Canada
604-827-3452 (Phone)
Pingyang Gao
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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