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| Author: | Allen, F. Carletti, E. |
| Title: | Mark-to-market accounting and liquidity pricing |
| Journal: | Journal of Accounting & Economics
2008 : AUG, VOL. 45:2-3, p. 358-378 |
| Index terms: | historical costs incomplete markets liquidity assets liabilities |
| Language: | eng |
| Abstract: | Asset prices may reflect the amount of liquidity available rather than the asset's future earning power, when liquidity plays an important role as in financial crises. In these circumstances it is not desirable that market prices are used to assess financial institutions' solvency. This study presents a model with a banking sector and an insurance sector based on Allen and Gale (2005a) and Allen and Carletti (2006). The paper shows that a shock in the insurance sector may cause the current market values of banks' assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic costs are used, banks are able to continue and meet all their future liabilities. The paper also discusses the implications for the debate on mark-to-market versus historic cost accounting. |
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