Financial economics: Difference between revisions
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Financial economics treats the [[financial system]] as an open interactive system dealing both | Financial economics treats the [[financial system]] as an open interactive system dealing both in claims upon future goods and services, and in the allocation of the risks that are associated with such claims. It is concerned with the investment choices made by individuals, with the financing choices made by ''corporations'', with the conduct of financial organisations that act as ''financial intermediaries'' between individuals and corporations; and with the effects of it all upon the economy. | ||
(See the related articles subpage for definitions of the terms shown in italics in this article) | (See the related articles subpage for definitions of the terms shown in italics in this article) | ||
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==Financial systems== | ==Financial systems== | ||
===Common features=== | ===Common features=== | ||
The essential functions of a financial system are taken to be to connect prospective investors with investment opportunities, and to allocate risk in accordance with the preferences of prospective risk-takers. Its components are taken be ''corporations'', investors, ''financial intermediaries'' and a ''financial regulator''; its instruments are taken to include a variety of types of shareholding, ''debt instruments'' and ''options'' that are traded, together with ''financial derivatives'', in a variety of ''financial markets''; and its activities are taken to be governed by rules and practices administered by regulatory authorities. The financial activities of governments are the subject of a separate article on [[public finance]]. | |||
===Effects on economic performance=== | ===Effects on economic performance=== | ||
The evidence strongly suggests that a well-developed financial system is good for economic growth, and although comparisons between systems in which companies | The evidence strongly suggests that a well-developed financial system is good for economic growth, and although comparisons between systems in which companies raise finance mainly by borrowing from the banks (as in Germany<ref>[http://www.cepr.org/Pubs/bulletin/meets/368.htm Colin Mayer and Ian Alexander: ''Banks and Securities Markets: Corporate Financing in Germany and the UK'', CEPR Discussion Paper No. 433, June 1990.]</ref> and Japan) with "equity-based systems" in which companies raise it mainly by issuing shares (as in the United States and Britain) have been inconclusive, they suggest that equity-based systems are better at promoting hi-tech growth. <ref>[http://www.finance.ox.ac.uk/file_links/finecon_papers/1999fe08.pdf Wendy Carlin and Colin Meyer: '' How do Financial Systems affect Economic Performance?'', Said Business School University of Oxford 1999]</ref><ref>[http://www.res.org.uk/society/mediabriefings/pdfs/2002/February/carpenterpetersen1.asp Robert Carpenter and Bruce Petersen: '' Capital Market Imperfection: High-tech Investment and New Equity Financing'', Economic Journal 2002]</ref>. Equity-based systems promote economic activity by enabling prospective investors to finance capital investment by purchasing shares offered by corporations. The incentive to do so is increased by a facility to dispose of them at will in ''financial markets'', and that incentive is further increased by the availability of ''financial derivatives'' that help the prospective investor to chose his preferred combination of risk and return. | ||
==The investment choices facing individuals== | |||
==The financing choices facing corporations== | |||
==The activities of the financial intermediaries== | |||
==The roles of financial regulators== | |||
==How it all works out== | |||
==References== | ==References== | ||
<references/> | <references/> | ||
Revision as of 10:06, 22 February 2008
Financial economics treats the financial system as an open interactive system dealing both in claims upon future goods and services, and in the allocation of the risks that are associated with such claims. It is concerned with the investment choices made by individuals, with the financing choices made by corporations, with the conduct of financial organisations that act as financial intermediaries between individuals and corporations; and with the effects of it all upon the economy.
(See the related articles subpage for definitions of the terms shown in italics in this article)
Financial systems
Common features
The essential functions of a financial system are taken to be to connect prospective investors with investment opportunities, and to allocate risk in accordance with the preferences of prospective risk-takers. Its components are taken be corporations, investors, financial intermediaries and a financial regulator; its instruments are taken to include a variety of types of shareholding, debt instruments and options that are traded, together with financial derivatives, in a variety of financial markets; and its activities are taken to be governed by rules and practices administered by regulatory authorities. The financial activities of governments are the subject of a separate article on public finance.
Effects on economic performance
The evidence strongly suggests that a well-developed financial system is good for economic growth, and although comparisons between systems in which companies raise finance mainly by borrowing from the banks (as in Germany[1] and Japan) with "equity-based systems" in which companies raise it mainly by issuing shares (as in the United States and Britain) have been inconclusive, they suggest that equity-based systems are better at promoting hi-tech growth. [2][3]. Equity-based systems promote economic activity by enabling prospective investors to finance capital investment by purchasing shares offered by corporations. The incentive to do so is increased by a facility to dispose of them at will in financial markets, and that incentive is further increased by the availability of financial derivatives that help the prospective investor to chose his preferred combination of risk and return.
The investment choices facing individuals
The financing choices facing corporations
The activities of the financial intermediaries
The roles of financial regulators
How it all works out
References
- ↑ Colin Mayer and Ian Alexander: Banks and Securities Markets: Corporate Financing in Germany and the UK, CEPR Discussion Paper No. 433, June 1990.
- ↑ Wendy Carlin and Colin Meyer: How do Financial Systems affect Economic Performance?, Said Business School University of Oxford 1999
- ↑ Robert Carpenter and Bruce Petersen: Capital Market Imperfection: High-tech Investment and New Equity Financing, Economic Journal 2002