THE IMPACT OF DERIVATIVES ON MARKET FUNCTIONING

Assoc. Prof. Carmen Costuleanu Ph. D Assoc. Prof. Roxana Angela Calistru Ph. D
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Assoc. Prof. Carmen Costuleanu Ph. D Assoc. Prof. Roxana Angela Calistru Ph. D: University “Petre Andrei” of Iaşi Faculty of Economics Iaşi, Romania

Annals of University of Craiova - Economic Sciences Series, 2011, vol. 4, issue 39, pages 138-141

Abstract: Derivatives were initially a response to the increased volatility of financial markets, but then the growth of financial derivatives has played a role in exacerbating shocks. Hence, implications of derivatives for the functioning of financial markets may differ between normal and crisis conditions. In normal market conditions, derivative markets perform a number of economic functions likely to help in discovery of future as well as current prices, to improve risk-sharing, to enhance the liquidity and efficiency in the market for the underlying asset etc. Given their leverage and low transactions costs, derivatives facilitate the taking of speculative positions and can assist uninformed investors in taking market positions, which could finally reinforce markets fall. In times of stress, they may increase the valuation uncertainties which inevitably arise in such periods.

Keywords: derivatives; financial markets; risk-sharing; underlying asset; leverage (search for similar items in EconPapers)
JEL-codes: G15 G32 (search for similar items in EconPapers)
Date: 2011
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