changes in credit risk may arise when either the value or the risk of corporate assets changes. changes in the equity value associated with the changes in the asset value and changes in asset risk can be characterized into potentially countervailing direct and indirect effects. the indirect effect of risk on equity value is a function of factors that affect the debt value of including leverage,...

This paper examines whether fair value accounting increases the pro-cyclicality of banks’ lending behavior. Exploiting cross-sectional variation in individual banks’ exposure to fair value accounting, I find that fair value accounting does not exacerbate the pro-cyclicality of bank lending over the past two business cycles during 1995-2010. This result holds despite the fact that every one doll...

A financial derivative, for example an option, is an instrument (contract) whose value depends on the values of some underlying variables, where the underlying can be a commodity, an interest rate, stock, a stock index, a currency, to mention just a few examples. The financial derivatives market is enormous and is regularly reported to be worth $500 trillion. Derivatives provide an efficient wa...