Townsend’s (1979) study was motivated in part by questions of optimal regulation of financial institutions such as intermediaries, and it suggests a simple theory of intermediation and avoid the difficulties associated with non-convex technologies using a game theoretic approach “non-cooperative game theoretic model”, and it is described in which exchange is motivated by risk sharing considerations. Through liberalization of interest rates and other restrictive; equity markets may improve allocation efficiency. On another hand, if the economy does not include equity market, then more government invention is necessary for financial system and advanced approaches are required (Cho, 1986).
Levine (1991) argues that stock markets affect growth in two ways. The first involves firm efficiency and depends on the externality in human capital production. Stock markets increase firm efficiency by eliminating the premature withdrawal of capital from firms. This accelerates the growth rate of human capital and per capita output. The second way stock markets can affect growth is to raise the fraction of resources devoted to firms. This does not necessarily depend on externalities but by increasing the liquidity of firm investment, reducing productivity risk, and improving firm efficiency, stock markets encourage firm investment. This stimulates human capital production and growth. Holmstrom and Tirole (1993) emphasize that a firm's ownership structure influences the value of market monitoring through its effect on market liquidity. Considering an agent holds some fraction of the firm as a long-term investment. If he decides to decrease his ownership, there will be more shares actively traded and the liquidity of the market will go up. Wit...
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... And they investigate that the liquidity of financial markets affect the choice of capital production technology, per capita income and per capita capital stock, the level of financial market activity, the real return on saving, and welfare of steady state equilibrium.
By pooling and diversifying risks, by increasing liquidity or by reducing monitoring costs, financial markets and institutions are believed to have a positive impact on growth because they divert investments towards more productive activities or increase the flow of savings (Blacburn and Hung, 1998).
Levine (1997) illustrates the role of finance in the growth by comparing between German bank-based system and United States securities market-based system. Which is called the “Functional Approach “. Levine argue that financial system
• Facilitate the trading hedging, diversifying, pooling of risk.
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
A strong financial system was formed through agriculture, trading, and the production of art. They share except...
Flawed financial innovations: the implementation of innovations in investment instruments such as derivatives, securitization and auction-rate securities before markets. The indispensable fault in them is that it was difficult to determine their prices. “Originate to distribute securities” was substituted by securitization which facilitated the increase in ...
If the world, consisting of the consciences of over six billion people wants the market to grow, then the market will grow. With international interest and knowledge we can eliminate fraud and stock pooling to raise stock prices. The markets will be more honest, and they will grow at a rate that we need them to, in order to continue with our exceptional economic growth rate.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
...el, 2003. The Efficient Market Hypothesis and Its Critics, Journal of Economic Perspectives, Vol. 17, No. 1, Winter 2003, pp. 59-82.
In turn everything in the present and the future is judged through the stocks as they hold a high importance in industrialized economies showing the healthiness of said countries economy. As investing discourages consumer spending over all decreases, it lead...
Capital markets are markets "where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income)" (Woepking, ¶3). The two major capital markets are stock and bond markets. Capital markets promote economic efficiency by moving funds from those who do not have an immediate need for it to those who do. Individuals or companies will put money at risk if the return on the intended investment is greater than the return of holding risk-free assets. An example of this would be those that invest in real estate or purchase stocks and bonds. Those that invest want the stock, bond, or real estate to grow in value or appreciate. An example of this concept would be if an individual or company invested an amount saved over the course of a year. While investing may be riskier, these individuals hope that the investment will yield a greater return than leaving the money in a savings account drawing nominal interest. In this example the companies that issue the stocks or bonds have spending needs that exceed their income so the company will finance their spending needs by issuing securities in the capital markets. This is a method of direct finance because the "companies borrowed directly by issuing securities to investors in the capital markets" (Woepking, ¶5).
Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.
...t Efficiency and Stock Market Predictability" [Online] Available On: http://www.e-m-h.org/Pesa03.pdf [Accessed On 5 december, 2011].
In order for any country to survive in comparison to another developed country they must be able to grow and sustain a healthy and flourishing economy. This paper is designed to give a detailed insight of economic growth and the sectors that influence economic growth. Economic growth in a country is essential to the reduction of poverty, without such reduction; poverty would continue to increase therefore economic growth is inevitable. Through economic growth, it is also an aid in the reduction of the unemployment rate and it also helps to reduce the budget deficit of the government. Economic growth can also encourage better living standards for all it is citizens because with economic growth there are improvements in the public sectors, educational and healthcare facilities. Through economic growth social spending can also be increased without an increase of taxes.
The stock market is an essential part of a free-market economy, such as America’s. This is because it provides companies the capital they need in exchange for giving away small parts of ownership in their company to investors. The stock market works by letting different companies sell stocks to gain capital, meaning they sell shares of their company through an exchange system in order to make more money. Stocks represent a small amount of ownership in a company. The more stocks a person owns, the more ownership they have of that company. Stocks also represent shares in a company, which are equal parts in which the company’s capital is divided, entitling a shareholder to a portion of the company’s profits. Lastly, all of the buying and selling of stocks happens at an exchange. An exchange is a system or market in which stocks can be bought and sold within or between countries. All of these aspects together create the stock market.
Machiraju, H. R. , 2002. International Financial Markets And India. 1st ed. New Delhi: New Age International.
It is a known fact that the banking industry plays a huge role in today’s society, the industry has grown rapidly of many decades and still growing. The banking sector is that sector of the society that is actually responsible for the handling of financial assets for other sector of the economy, they do this by investing the financial assets in order to create more wealth in the society while regulating all the activities involved in the process. (What is the banking Sector 2015)
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.