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Lecture Money and capital markets: Chapter 3 - Peter Rose, Milton Marquis

Chapter 3 - The financial information marketplace. In this chapter you will be able to identify the most important sources of information about the money and capital markets and the financial system, discover why the efficient distribution of information within the financial system is so important and what can happen when relevant financial information is not readily available to all market participants. You will understand how any individual or institution active in the financial marketplace can keep track of the prices of financial assets and interest rates. | Chapter 3 The Financial Information Marketplace Learning Objectives To identify important sources of information about the financial system. To understand why the efficient distribution of information within the financial system is so important. To learn how market participants keep track of the prices of financial assets. To learn about the flow of funds accounts and discover what is meant by “social accounting.” Introduction Sound financial decisions require adequate and reliable financial information. We may divide the sources of information relied on by financial decision makers into: debt security prices and yields, stock prices and dividend yields, information on security issuers, general economic and financial conditions, and social accounting data. The Great Debate Over Efficient Markets & Asymmetric Information The efficient markets hypothesis (EMH) contends that information relevant to the pricing (valuation) of loans, securities, and other financial assets is readily . | Chapter 3 The Financial Information Marketplace Learning Objectives To identify important sources of information about the financial system. To understand why the efficient distribution of information within the financial system is so important. To learn how market participants keep track of the prices of financial assets. To learn about the flow of funds accounts and discover what is meant by “social accounting.” Introduction Sound financial decisions require adequate and reliable financial information. We may divide the sources of information relied on by financial decision makers into: debt security prices and yields, stock prices and dividend yields, information on security issuers, general economic and financial conditions, and social accounting data. The Great Debate Over Efficient Markets & Asymmetric Information The efficient markets hypothesis (EMH) contends that information relevant to the pricing (valuation) of loans, securities, and other financial assets is readily available to all borrowers and lenders at negligible cost. The Great Debate Over Efficient Markets & Asymmetric Information On the other hand, the concept of asymmetric information argues that the financial marketplace contains pockets of inefficiency in the availability and use of information, such that insiders can earn excess returns by selectively trading financial assets based on the special information they have been able to acquire. The Great Debate Over Efficient Markets & Asymmetric Information In an efficient marketplace, each individual investor will rationally use all the relevant information that is available to value stocks and bonds. Hence, each financial asset will generate an ordinary, normal or expected rate of return commensurate with its level of risk. The Great Debate Over Efficient Markets & Asymmetric Information If the EMH holds, any temporary deviation of actual returns from expected returns should be quickly eliminated as investors react to temporary .