Financial Markets: A Tool for Transferring and Managing Risk?
The last financial crisis showed that the world economy is globally exposed to all kinds of risks. When equity and real estate markets capture the creation of global wealth, derivatives markets make it possible to value and transfer risk. Hedging and speculation are the main motivations of the participants who buy and sell the numerous products traded in these markets. Following Robert Shiller’s writings, this chapter aims to show that these markets, whether organized or not, may provide new ways to manage most of the risks both firms and individuals are facing. However, at the same time, huge risk transfers may foster speculation and lead to new systemic risks, as revealed by the credit derivatives market in recent years. This paper considers how the financial markets can better serve people (individuals, long investors, funds) in the context of the current economic situation. Firstly, the paper characterizes the risks individuals are facing and to what extent they can be measured and hedged through the financial markets. Then, examples of risk transfer are shown using the example of the real estate market. The role of information required to construct relevant indices that can be used as underlying assets is also highlighted. Finally, the unwanted effects of risk transfer are considered, especially the role of speculation and the possible increase of systemic risk. The conclusions underline the importance of the quality of information that should be at the heart of new rules designed to regulate the development of derivative products.
KeywordsReal Estate Financial Market Systematic Risk Future Market Credit Default Swap
The author wants to thank Paul Nagy for his comments, suggestions, and reviews of this chapter.
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