Direct Contagion in Financial Networks with Mark-to-Market and Historical Cost Accounting Rules

Mario Eboli

Abstract


In this paper we compare the effects of two accounting rules, the mark-to-market and the historical cost regimes, on the dynamics of direct, balance sheet contagion in financial networks. This is done using a flow-network representation of a financial system and of the propagation of losses that crosses it as a consequence of a negative shock. We show that, for any network and any shock, the flow of losses generated with the mark-to-market rule is larger than the one generated by accounting at historical cost. This implies that a financial network is more exposed to default contagion, both in terms of scope and threshold of contagion, under the marking-to-market accounting regime, than with the historical cost regime.


Full Text: PDF

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

Copyright © Canadian Center of Science and Education

To make sure that you can receive messages from us, please add the 'ccsenet.org' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.