The many roles of financial markets Fatih Ayık

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The many roles of financial markets Fatih Ayık

  1. 1. FATİH AYIK
  2. 2. Outline <ul><li>Introduction </li></ul><ul><li>Choice of Consumption </li></ul><ul><li>The Role of Management </li></ul><ul><li>Financial Markets and Information </li></ul>
  3. 3. Introduction <ul><li>The Growth of Financial Markets </li></ul><ul><li>The Share of Banks Fall </li></ul><ul><li>Securities Markets and Financial Derivatives increase </li></ul><ul><li>The role of banks in the economic system </li></ul>
  4. 4. Introduction <ul><li>Securities markets criticized: </li></ul><ul><li>they are driven by speculation </li></ul><ul><li>they consume too many resources </li></ul><ul><li>Financial markets for effective allocation </li></ul>
  5. 5. Choice of Consumption <ul><li>Financial markets: </li></ul><ul><li>Enable to consume and to exchange </li></ul><ul><li>Allow efficient risk-sharing </li></ul><ul><li>Two types of risks: </li></ul><ul><li>Diversifiable </li></ul><ul><li>Nondiversifiable </li></ul>
  6. 6. Choice of Consumption <ul><li>Diversifiable risk can be eliminated </li></ul><ul><li>Transfer of non-diversifiable risk </li></ul><ul><li>Financial markets offer an array of financial instruments </li></ul>
  7. 7. Choice of Consumption <ul><li>For example: </li></ul><ul><li>Extremely risk-averse investors may invest to risk-free securities. </li></ul><ul><li>More risk tolerant investors may invest risky stocks. </li></ul><ul><li>Intermediate risk preferences may choose a conbination of bonds and stocks. </li></ul>
  8. 8. The Role of Management <ul><li>Financial markets enable seperation of ownership </li></ul><ul><li>A professional maneger can be delegated </li></ul><ul><li> Managers do not need: </li></ul><ul><li>to know anything </li></ul><ul><li>to consult shareholders’ own tastes </li></ul>
  9. 9. <ul><li>The Role of Management </li></ul><ul><li>Managers need : </li></ul><ul><li>to follow only one objective </li></ul><ul><li>to invest in projects </li></ul>
  10. 10. <ul><li>The Role of Management </li></ul><ul><li>Managers’ objective: </li></ul><ul><li>is investing in positive net present value projects. </li></ul><ul><li>maximizes the market value </li></ul><ul><li>is in the best interest </li></ul>
  11. 11. Financial Markets and Information <ul><li>The stock market ; </li></ul><ul><li>aggregates the diverse opinions of market participants </li></ul><ul><li>conveys how much the equity of a company is worth </li></ul><ul><li>leads to the more efficent use of assets </li></ul><ul><li>enables poor management to be disciplined </li></ul>
  12. 12. <ul><li>Financial Markets and Information </li></ul><ul><li>Stock price may respond in two ways ; </li></ul><ul><li>Negative way </li></ul><ul><li>Positive way </li></ul><ul><li>Stock price is negative: </li></ul><ul><li>re-examine calculations </li></ul><ul><li>re-consider plan </li></ul>
  13. 14. <ul><li>Financial Markets and Information </li></ul><ul><li>Monitoring needs to be done by one party </li></ul><ul><li>Duplication: </li></ul><ul><li>may not result in better monitoring </li></ul><ul><li>would waste resources. </li></ul>
  14. 15. Financial Markets and Information Stockholders cannot profitably combine to hire a monitor because of bearing the costs of monitoring to the others.

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