When an asset trades on an exchange, its price is a fact: it results from a transaction between a buyer and a seller. But what is an asset worth if it never trades? Lacking an observable price, you estimate it, by means of a model. The fact becomes a judgment, and that is the whole subject of this notion.
1 Observed or estimated
Two very different ways of knowing a value.
Price and value
A price is observed, an estimate is manufactured
A market price (mark-to-market) is observed: a real transaction is required to establish it. When the asset does not trade, this observation is impossible; one then resorts to model-based valuation (mark-to-model): the holder estimates the "fair value" from assumptions (future cash flows, discount rate, comparables). The difference is cardinal: in one case, the market decides; in the other, it is the holder of the asset who decides what it is worth. Private credit loans, units in unlisted funds, and untraded real estate belong to this second world.
2 Level 3
The accounting box for unobservable values.
The fair value hierarchy
From the observed price to the internal assumption
The accounting standards (IFRS 13, ASC 820) classify assets into three levels according to the reliability of their valuation. Level 1: an observable quoted price (a share on an exchange). Level 2: no direct price, but comparable market data. Level 3: unobservable inputs, that is, a model and internal assumptions. The lower you go, the less verifiable the value. Private credit sits at Level 3, the most opaque: its value is neither quoted nor backed by reliable comparables, but estimated "at the discretion of an expert".
3 Smoothed volatility
An estimated value does not shake when the market shakes.
Smoothing
A calm that is not stability
Because it is not marked to market, an estimated value does not react to shocks: it is "smoothed", it moves little and with a lag. The reported volatility is thereby made artificially low, and the risk-adjusted returns flattering. The fund manager Cliff Asness speaks of "volatility laundering": the risk is not reduced, it is removed from view. When you "de-smooth" the returns to reconstruct their true variability, you recover a risk far higher than the one the figures displayed.
4 Liquidity risk
The danger that reveals itself at the worst moment.
Selling, fast, at a fair price
What the absence of a market really costs
Illiquidity is the impossibility of quickly selling an asset at a price close to its assumed value. As long as the holder keeps the position, illiquidity remains invisible: it has no apparent cost. But should a sale become urgent — a wave of redemptions in a publicly open fund, for example — and the gap between the estimated value and the price actually obtained reveals itself brutally. Liquidity risk is therefore a deferred risk: it is not seen in calm times, and it is paid all at once in hard times.
5 Takeaways
To remember.
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A price is observed through a transaction; without a transaction, the value is estimated by a model (mark-to-model).
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Level 3 of the accounting hierarchy (IFRS 13 / ASC 820) groups values based on unobservable inputs: the least verifiable.
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An estimated value is smoothed: the reported volatility is artificially low, the risk is not removed but hidden.
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Liquidity risk is deferred: invisible as long as you do not sell, brutal when you must sell fast.
This notion sheds light on an analysis
First published: 27 June 2026