The Impact of Risk Modeling on the Market Perception of Banks’ Estimated Fair Value Gains and Losses for Financial Instruments

51 Pages Posted: 21 Apr 2015

See all articles by Gauri Bhat

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Date Written: April 2015

Abstract

We examine whether and how measures of market and credit risk modeling identified from banks’ financial reports enhance the returns-relevance of their estimated annual unrealized fair value gains and losses for financial instruments. To capture differences in market liquidity and fair valuation difficulties across types of financial instruments, we distinguish unrealized gains and losses that are recorded in net income versus recorded in other comprehensive income versus calculable using financial statement note disclosures. We predict and generally find that banks’ market (credit) risk modeling enhances the returns-relevance of their unrealized fair value gains and losses, more so for less liquid instruments subject to greater market-risk-related (credit-risk-related) valuation difficulties and during periods for which market (credit) risk is higher. We obtain these findings both for banks’ unadjusted risk modeling measures and for the portions of these measures that we model as attributable to banks’ risk modeling activities, but not for the portions we model as attributable to banks’ disclosure of these activities.

Keywords: Risk modeling, market risk, credit risk, chief risk officer, fair value, estimates disclosure.

JEL Classification: G14, G21, G32, M41

Suggested Citation

Bhat, Gauri and Ryan, Stephen G., The Impact of Risk Modeling on the Market Perception of Banks’ Estimated Fair Value Gains and Losses for Financial Instruments (April 2015). Accounting, Organizations and Society, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2596650

Gauri Bhat (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-7682964 (Phone)

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
148
Abstract Views
1,179
rank
220,158
PlumX Metrics