TITLE:
Fair Value and Its Economic Consequence on the Volatility Measures of Earnings, Stock Price and Government Debt Yield
AUTHORS:
Lan Sun
KEYWORDS:
Fair Value, IFRS, Earnings Volatility, Stock Return Volatility, Government Debt Volatility
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.9,
December
22,
2014
ABSTRACT: Many banks and commentators argued that fair value accounting
was the root caused the procyclical decline in bank assets and capitals, the failures
of large financial sector and extreme volatility in financial asset prices during
the GFC. Fair value measurements may result in different figures for earnings and
capital, both of which are important as buffers against insolvency. Fair value may
also convey different messages to the market, either value relevance or volatility,
it will lead to different economic consequences in allocating capital resource.
This study is an attempt to review the studies of fair value and its impact on earnings
volatility and stock price volatility and takes a step further it shows the way
in which fair value could potentially introduce volatility into the financial system
in particularly a mathematical derivation shows that the government bonds volatility
is affected by earnings volatility and its decomposition of fair value and historical
cost earnings volatilities. As such, fair value may contribute to a highly volatile
market and general investors need to understand the tradeoff between fair value
relevance and volatility in making an investment decision.