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Relevance of Financial Intermediaries in Efficient Financial Market

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Relevance of Financial Intermediaries in Efficient Financial Market International Journal of Research and Development - A Management Review (IJRDMR) _______________________________________________________________________________________________ Relevance of Financial Intermediaries in Efficient Financial Market 1Yogita Wagh, 2M Mallika Reddy 1,2MLR Institute of Technology Abstract : Financial intermediaries trade frequently in lending of assets by making sale of them which are many markets using sophisticated models. Their marginal issued for first time in the market. Financial markets value of wealth should therefore provide a more have capability of operating efficiently despite of this informative stochastic discount factor (SDF) than that of a they become more competent by financial representative consumer. Guided by theory, we use shocks intermediaries. This report outlines the structure, to the leverage of securities broker-dealers to construct an intermediary SDF. Intuitively, deteriorating funding components, importance and efficiency of financial conditions are associated with deleveraging and high markets .the report further explains the nature of marginal value of wealth. Our single-factor model prices financial intermediaries and the role of intermediaries in size, book-to-market, momentum, and bond portfolios with making financial market more competent. an R2 of 77% and an average annual pricing error of 1%— performing as well as standard multifactor benchmarks Structure of financial market: designed to price these assets. The financial markets can be divided in to two as direct I. INTRODUCTION: and indirect finance. Direct finance involves buying and selling of financial assets, where the borrowers borrow Financial transaction involves trading of financial funds directly from lenders which involves sale of instruments at a physical place which is often referred as financial asset which acts as income for borrower in financial markets .The whole process involves future. Indirect finance involve buying and selling of intermediaries which help in completing the process of financial asset through financial intermediary as stated financial transaction. Financial markets facilitates flow by Arner (2007). of money from lenders to borrowers through direct transfer or by use of intermediaries as stated by Melicher & Norton (2011) and it helps in improving wealth of individuals and business and then economy. Financial markets play vital role in economic development through resource allocation (making investments), market diversification and facilitating international trading. The report outlines the role played by financial intermediaries in the financial markets. Financial markets involve trading of financial instruments which have been previously introduced in the market and also involve trading of assets which are issued for first time in the market. Financial markets assist borrowing and Source: http://www.ecb.europa.eu/mopo/eaec/structure Structure of financial system consist of debt and equity Megginson & Smart, 2008 the secondary markets helps markets where equity markets can be further classified in setting share prices in the market. as primary and secondary markets as stated by Ghosh & Financial markets and its economic functions: Ortiz (2013).according to Berg, Grande & Mongelli(2005), the efficient debt market are A financial market is a market where financial characterized by competitive market structure ,good instruments are exchanged or traded. infrastructure and high level of diversification and low transaction cost. Where the equity market consist of Financial markets provide the following three major buying and selling of shares where companies are bound economic functions: to pay dividends indefinitely as stated by Hedi, Fredj, Price discovery Jawadi & Khuong(2010).the primary market involves issue of shares for first time which is done through Liquidity investment banks and the secondary market consist of Reduction of transaction costs buying and selling of existing shares and according to ________________________________________________________________________________________________ ISSN (Print): 2319–5479, Volume-5, Issue–3, 2016 129 International Journal of Research and Development - A Management Review (IJRDMR) _______________________________________________________________________________________________ 1) Price discovery: This is the function which 2) Liquidity: This is the function of financial determines the price of traded asset, the return expected market that helps an investor to sell their financial from the investor form his investment is determined by instruments at fair price in the market as and when participants in the financial market. The investors will required otherwise the investor has to hold their invest if high rate of return are expected from their financial instruments until conditions arise to sell. investments .This is the function of financial market 3) Reduction of transaction costs: Transaction which suggest that how the funds will be made available costs are cost of buying or selling financial instruments to those who wants to lend than to who wants to borrow. and this cost is beard by financial intermediaries to buy or sell financial instruments. Source: market.orkitra.com II. CLASSIFICATION OF FINANCIAL MARKETS: Source: http://www.web-books.com/eLibrary As stated by Steven Valdez(2013)there are various traded mechanism.Primary Securities (claims on the classifications available for financial markets .the first future income of ultimate borrowers e.g. bills, bonds, type of classification is based on ownership claim on equities) are traded on financial markets. Secondary assets and earnings verses. Fixed claim on revenues i.e. securities (claims on financial intermediaries e.g. debt and equity .the equity gives ownership and debt deposits, insurance policies, unit trusts) are not generally gives claim on assets and earnings. The financial traded on financial markets. markets can also be classified as capital and money Money Markets – funds are borrowed for a short time (a markets. Capital market is market of long term securities year or less) and money market is market of short term securities. Securities traded for a long time in the market than it is Capital market – funds are borrowed for long periods, secondary market. The secondary market can use either sometimes with no redemption date. for trading as over the counter (OTC) or exchange ________________________________________________________________________________________________ ISSN (Print): 2319–5479, Volume-5, Issue–3, 2016 130 International Journal of Research and Development - A Management Review (IJRDMR) _______________________________________________________________________________________________ The secondary market aids the primary market by: Deposit Taking Institutions Banking Dept of B of E making the primary securities more liquid and Retail Banks hence more attractive to buyers thus reducing the cost of British Merchant Banks Banks Monetary Financial funds to borrowers Overseas Banks Institutions helping to find the appropriate price for new Building Societies issues of primary securities Whilst some economic agents prefer to operate in the Non Deposit Taking Institutions * money market and others in the capital market, they are free to switch (and do switch) as the advantage of doing Insurance Companies so presents itself. Clearly the divisions among the • Life money markets are even less watertight than those • General between the money and capital markets. This means that Pension Funds a change in interest rates in one market will be Unit Trusts ** transmitted through to the rest. Investment Trusts Financial Markets Efficiency * Basically they offer products which provide insurance (funds when needed) and/ or savings. Efficient markets are those markets where a share price reflects that all information is efficiently available in the ** Both enable savers to enjoy the benefits of a markets. Whenever investors see profit opportunities in diversified portfolio at a smaller amount of funds than any share they tend to buy them and result would be the they could achieve on their own. Unit trusts are sold increase in the share prices. This mechanism continues back to the managers to liquidate them. Investment in the market till price equilibrium is achieved. The trusts are sold on the market. We now distinguish Keen investors are able to recognize profit opportunities, functions rather than institutions because most and make profits before other investors have the institutions are now multi-functional these days. E.g. awareness of such opportunities. Bailey(2005)stated that institutions which were traditionally retail banks now the financial market are efficient because the profit involved in insurance services, unit trusts, investment opportunities are utilized and eliminated by maintaining banking etc. Institutions, which were traditionally market conditions despite of existence of uninformed insurance companies, offer savings and banking and irrational market participants. According to Hassan services, unit trusts etc.The banking system is an & Lewis (2007) the securities are accurately priced in an important component of the financial system: efficient market and always reflect definite market For many countries, especially developing conditions impacting returns of securities. countries, the banking system is the dominant Financial intermediaries: component of the financial system. Distinction between Monetary Financial Intermediaries Banks are
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