33 Pages Posted: 30 Jul 2008
Date Written: 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.
Keywords: Marking to market, accounting regime, monetary policy, financial stability
JEL Classification: G12, G21, G22, G28
Suggested Citation: Suggested Citation
Plantin, Guillaume and Sapra, Haresh and Shin, Hyun Song, Marking to Market, Liquidity and Financial Stability (July 7, 2005). Available at SSRN: https://ssrn.com/abstract=1186342 or http://dx.doi.org/10.2139/ssrn.1186342
By Pingyang Gao