Derivatives and Stock Market Volatility: Is Additional Government Regulation Necessary?
Financial institutions and markets occupy a pivotal position in the economy through their role in allocating funds and as the core of the payment systems. Moreover, financial intermediaries are in a unique position of trust in managing funds belonging to the general public. These considerations have led governments to legislate a plethora of regulations that are designed to enhance or maintain public confidence in financial markets. To a large degree, this regulatory emphasis reflects the worry that failure of financial intermediaries and chaotic episodes in securities markets can impair public confidence in t he financial system, which may lead to a massive withdrawal of funds from financial intermediaries. Obviously, such a crisis would cause a serious breakdown of the financial system in which not only investors would lose, but the entire economy would suffer. However, government regulation of the securities markets also reflects the concern for the protection of investors whose savings are invested either directly in the securities markets or entrusted to profesionally managed financial intermediaries.
KeywordsStock Market Stock Return Security Market Financial Intermediary Derivative Market
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