K. Describe Characteristics of a Well-Functioning Financial System Flashcards
SchweserNotes: Book 4 p.218 CFA Program Curriculum: Vol.5 p.58
A well functioning financial system
Complete markets: Savers receive a return, borrowers can obtain capital, hedgers can manage risks, and traders can acquire needed assets. Well-developed
markets that allow people to use the
markets to solve financial problems.
Operational efficiency: Trading costs are low. Low
transaction costs facilitate investment,
borrowing, hedging, asset exchanging.
Informational efficiency: Prices reflect fundamental information quickly. Prices reflect changes in fundamental
values and not demands for liquidity. security prices reflect all information associated with fundamental value in a timely fashion.
Allocational efficiency: Capital is directed to its highest valued use.
Timely financial disclosures allow
investors to value securities and
contracts.
Other
In a well-functioning market, prices should not typically change much from one transaction to the next because many buyers and sellers are willing to trade at prices near the current price. Characteristics of a well-functioning market include availability of reliable information on prices and transaction volume; liquidity (marketability and price continuity); prices that react quickly to new information; and low transactions costs.
