(a) Discuss various measures of capital market efficiency and how efficient capi
ID: 1209443 • Letter: #
Question
(a) Discuss various measures of capital market efficiency and how efficient capital markets contribute to the efficiency in the market for goods and services (including productive capital). As part of your discussion, consider the implications of the fact that the bulk of trading in capital markets is in outstanding securities and analyze the meaning of the terms "depth," "breadth," and "resiliency" as descriptions of capital markets. Include in your discussion the types of legislative and regulatory reforms that might be or have recently been instituted in order to improve the efficiency of capital markets and the role of "insider trading" and the SEC as they affect market efficiency.
(b) Compare money and capital markets and identify the major issuers of securities in the different markets and the difference among the various types of securities within and between each of the markets. Within your discussion of the money markets include a consideration of the role of the Federal Reserve System (Fed) and the banking system as they interact through required reserve maintenance, needs for liquidity and monetary policy actions by the Fed. Consider in your analysis the types and significance of the links between the money and capital markets via the term structure of interest rates, issuers of debt and equity and the presence of interest rate and credit risk derivatives.
Explanation / Answer
1)Capital market efficiency is when there is information assymetry in the capital market ,it is judged by incorporating information about the securities .The fluctuations in stocks encourages traders to trade in a competitive manner with objective of maximising profit.The information may usually be costly to achieve but with ease in technology it is easily accesible now.The efficiency also depends on the form of efficiency weak , semi-strong or strong form of market efficiency.
The funds are flowing in the capital market between savers and borrowers, so the efficiency in pricing system is important because not all investor will have to analysis the market as efficiently as others and these are the reasons giving rise to insider trading thereafter.
2)Money market is also termed as the liquid market involving short term assets for the purpose of operating expenses ,or working capital.Companies rely a lot on short term fund needs and government like fed plays a role in ensuring the availability on daily basis without expensive loans or without holding excess funds.Hence investors consider it a very safe funding options, and attracts large number of risk aversive investors.
Capital market includes both bond and stock market and uses money for long term purposes ,the companies issued money in the form of bond to raise debt and funds .Government issues bond in the form of t bonds and mostly such entities are the sellers in the market.Only the issued securities are then elegible to float in the secondary market ,therefore it is a more long term investment prospect compared to the money market .The interesst rates offered on bonds are much higher depending on the credibitlity of the borrowing firms .
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