Marking to Market, Liquidity, and Financial Stability

Guillaume Plantin (1) , Haresh Sapra (2) , Hyun Song Shin (3)

1 Tepper School of Business
2 University of Chicago
3 Princeton University

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

Domains: Humanities and Social Sciences; Economics and Finance

Guillaume Plantin, Haresh Sapra, Hyun Song Shin. Marking to Market, Liquidity, and Financial Stability. 2005. ⟨hal-03459036⟩