Financial markets and sovereign debt Essay Example | Topics and Well Written Essays - 1750 words

Financial markets and sovereign debt - Essay Example Among securities that are traded in the financial markets are bonds, stock as well as commodity materials such as the agricultural products and precious metals. It therefore adopts the notion of a common market in that it presents a platform in which interested buyers meets with interested sellers as well as the commodities on bargain. In a financial market, parties participating are government agencies, individual persons, firms as well as households. This is a common feature with a market economy where the government relies primarily on the structures of buyers as well as sellers in allocation of resources as contrasted to non-market or commodity economies. Besides, the effects vary depending on the stage of development of an economy where in the emerging economies; the governments largely take the responsibility in financial aid and financial management and participation especially for the reason of such eventual occurrences as the sovereign risks (Aizenman, Jinjarak and Park, 201 3, para 1-5; Herrero, 2005, p. 5). Discussion Financial markets and the global economy Basic responsibilities of financial markets in finance include capital summation, risk transfers, discovery of prices, global participation in integrating financial markets as well as liquidity transfers (‘International Monetary Fund’, 2010, p. 1). ... 1-4). The financial markets also brings together borrowers and lenders where in money markets, firms borrow finances on short term while capital markets provide long term based funding to corporations for expansion purposes.The following illustration is on the interactions that are engaged in financial markets as well as the parties to the transactions. Lenders Financial intermediaries Financial markets Borrowers Individuals as well as companies Banks, insurance firms, pension funds as well as mutual funds Interbank Stock Exchange, money Markets, Bond Markets as well as Foreign Exchange Individuals, Companies, Central Governments, Municipalities as well as Public Corporations The relationship depicted therefore shows that borrowers, lenders and financial intermediaries have a common link through the financial markets where stock exchange, bonds as well as foreign currencies are traded. It is worth noting that the interaction of these parties at the international scene depicts the act ual picture of the global economy. Market efficiency is a critical concept that must be employed in the analysis of financial markets as well as the global economy and it involves three categories: strong, semi-strong as well as the weak form of efficiencies. However, the inefficiencies notable in financial markets result from ‘frictions’ which broadly represents asymmetries in information and taxes as well as costs of transactions. Value and liquidity in the transactions are therefore basic features in the consideration of efficiencies in financial markets. The concept of efficiency is very critical in investment decisions by investors within a country besides guiding on such decisions as arbitration and speculation. Information influences the behavior of