Mark to model

In normal circumstances, securities such as shares or bonds are valued by using market prices: this valuation method is called 'mark to market'.

In normal circumstances, securities such as shares or bonds are valued by using market prices: a share in Acme Widgets sold for £1.50, so your holding of Acme Widgets in your portfolio should be valued at that price. This valuation method is called 'mark to market'.

But in situations where the securities are rarely traded and there are no recent reference prices, valuing your holdings may be more difficult. So these investments may be valued in alternatives ways that use internal pricing models or assumptions, a process known as "mark to model".

Typically the type of assets that are valued using this technique are complex derivatives contracts and securitised debt instruments. The sub-prime mortgage crisis in 2007 highlighted the problem with mark to model, in that valuations based on models and assumptions can be wildly incorrect: default rates proved higher than expected and holders of these securities ultimately had to write off tens of billions of dollars.

A second problem is that even if valuations are accurate, it may be difficult to sell illiquid securities quickly at a fair price, so marked-to-model portfolios can give a false impression of how much can be raised in a fast sale.

Most Popular

Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Best regular savings accounts – December 2022
Savings

Best regular savings accounts – December 2022

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
1 Dec 2022
Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
29 Nov 2022