Asymmetric information and moral hazard are important concepts in understanding the evolution of financial markets
Asymmetric information and moral hazard are important concepts in understanding the evolution of financial markets
Name: Qiwei Sun
When we consider the evolution of financial markets, information is the thing that we must pay much attention to deal with. Asymmetric information and moral hazard, the two important concepts, are playing key roles in the information system. Both of them could hinder the development of financial markets. So, in order to make the financial markets developing much more stably and orderly, we must try to solve the asymmetric information and moral hazard problems.
For asymmetric information, the reason why it exists in financial markets is from two perspectives. In macroscopic view, the market economy system is imperfect. So with the inadequate laws and regulations, there is a poor flow of information, and the limited information that people can get may even be distorted. Thus, people cannot get the full value of the information from markets. In microcosmic view, when companies or individuals are borrowers, they know their managing abilities and development prospects well, so in order to acquire capital, they will conceal the true operating performance and risks to financial brokers to seek credit support. When companies or individuals are depositors, they will deposit money to the financial brokers who know well about their own abilities and credit level, so the financial brokers will try to hide their disadvantages and exaggerate capital quality, then acquire more funds. All these before-transaction asymmetric information will result in unfair trades in financial markets, one party of the transaction may suffer big loss or unfair treatment, thus hamper the healthily development of financial markets.
All the following ways are effective to reduce information asymmetry in financial markets, like the mandatory information disclosure and reporting system of stock market, the rating system of securities, the credit evaluation system
Name: Qiwei Sun
When we consider the evolution of financial markets, information is the thing that we must pay much attention to deal with. Asymmetric information and moral hazard, the two important concepts, are playing key roles in the information system. Both of them could hinder the development of financial markets. So, in order to make the financial markets developing much more stably and orderly, we must try to solve the asymmetric information and moral hazard problems.
For asymmetric information, the reason why it exists in financial markets is from two perspectives. In macroscopic view, the market economy system is imperfect. So with the inadequate laws and regulations, there is a poor flow of information, and the limited information that people can get may even be distorted. Thus, people cannot get the full value of the information from markets. In microcosmic view, when companies or individuals are borrowers, they know their managing abilities and development prospects well, so in order to acquire capital, they will conceal the true operating performance and risks to financial brokers to seek credit support. When companies or individuals are depositors, they will deposit money to the financial brokers who know well about their own abilities and credit level, so the financial brokers will try to hide their disadvantages and exaggerate capital quality, then acquire more funds. All these before-transaction asymmetric information will result in unfair trades in financial markets, one party of the transaction may suffer big loss or unfair treatment, thus hamper the healthily development of financial markets.
All the following ways are effective to reduce information asymmetry in financial markets, like the mandatory information disclosure and reporting system of stock market, the rating system of securities, the credit evaluation system