Tipology : Encyclopedia

(See also the entry Financial Market)
International financial market is the place where financial wealth is exchanged. It can be seen as the extended set of a system of rules and institutions in which securities are exchanged from surplus individuals to deficit individuals and in which institutions regulate the entire process.
The financial market comprises the markets in the strict sense (stock market, bond market, currency market, derivatives market and commodities market), the institutions that in various capacities operate therein with different purposes/functions (Central Bank, Ministry of the Treasury, Monte Titoli, Italian Stock Exchange, CONSOB) and the direct/indirect policies aimed at making the financial market the place (not necessarily physical and not necessarily regulated, but regulated) where the exchange from surplus to deficit units is completed as efficiently as possible. Policies include those related to monetary, fiscal and more structural policies as well as those directly inherent to the governance of the market itself.
The governance rules in a financial market can be either micro-economically or macroeconomically defined.
Microeconomic rules concern both the broader individuals operating in it (individual savers, professional agents, companies) and the market itself and its micro structure. Macroeconomic governance rules concern the market as a whole. The latter are in turn very much related to the policies that regulate the market.

At the microeconomic level, governance is important for a financial market to define all those rules of participation in the exchange process. From those that regulate stock exchanges or OTC exchanges to those that define the market participants themselves. Also important is the microstructure of the market itself, where microstructure means the rules of formation and definition of the exchange price of securities. This is a focal point for the functioning of the market. On the rules of formation of the price at which the security in question will be traded depends what is called the liquidity/thickness/depth of the market itself. At the microeconomic level, the stages of trading a security in the financial market are: Listing, Trading (proper), and Post-trading, which in turn includes Clearing, Settlement and Custody. For market participants, each of these phases must be defined in order to trade at the defined price and time. Each of the phases has its own rules designed to make those operating in the financial market capable of defining their strategies also on the basis of variously defined expectations. On the definition of these rules depend the returns of the securities traded. Every market has its own rules concerning its microstructure. Different markets have different liquidity precisely because of the micro-rules they have given themselves. These rules apply to both regulated and OTC trading.

Another type of micro-economic governance rules are those that define, for instance, who is allowed to operate in the market and how. Microeconomic rules also concern the way the institutions themselves operate in the market.
Something else is to be understood with regard to the macroeconomic rules of the financial markets. They are mostly related to the broad policies of the market itself. These can be the definition of the institutions necessary for the market and thus its structure, the purposes of the market itself and the monetary and fiscal policies that characterize it. All this makes a financial market unique with respect to the economy in which it operates. One of the characteristics of this uniqueness is market transparency. This characteristic can be defined by its (governance) rules, institutions, agents and policies. A market is all the more transparent the more individuals can ex-ante know the entire process of completing the exchange of securities. This causes expectations to be heterogeneous for individuals/agents but, at the same time, to reflect the available information that is then processed according to different buying/selling strategies.

This leads to the definition of expectations. In a financial market, defining the role that expectations play has two purposes. The first is defined at the macroeconomic level. Expectations are defined, by those who operate in it, with respect to the policies, the rules that will be adopted in the market itself. This leads to the definition of buying/selling strategies based on the role that, for example, inflation will play at the next instant t+1 given the policies/rules defined at t. This type of expectation varies depending on the discretion that exists in the definition of rules not only at the macroeconomic level but also at the micro level. The second purpose is microeconomic. Agents formulate their expectations to anticipate changes in asset prices in order to determine asset returns. This point relates to the concept of liquidity introduced earlier. In the trading phases in a financial market, different levels of liquidity lead to different expectation formation. In the same way, the different discretion in setting macroeconomic rules determines a different formation of inflation expectations that then fall on the market.

Macroeconomic rules, as defined above, are linked to the policies (monetary and fiscal that affect the financial market). The policies to which a financial market is subject largely depend on the institutions that regulate it. Institutions are therefore both subject to rules of operation and subjects that, in various capacities, enforce the rules of operation of the market. The rules are determined by the institutions and in turn define the scope of the institution itself. Individuals are subject to these rules but at the same time they decide to operate in a market according to the rules it gives themselves. Transparency, liquidity and the role of expectations help individuals to choose the market in which to operate in order to maximise their utility (whichever way this is defined).
The financial market thus examined is a complex system in which rules, individuals and institutions interact. This complexity increases over time and space (if we are talking about the international financial market). In time because financial markets play an increasingly important role in the intermediation of the financial savings of agents both nationally and internationally. In space because the instruments available to agents are becoming increasingly complex and at the same time increasingly defined. These instruments are used through the reference markets (stock market, bond market, currency market, derivatives market, commodities market and currency market) which are a fundamental part of the financial market. Each of the markets has characteristics that distinguish it. These characteristics are what then define the areas in which agents operate according to the risk associated with them.

Bibliography
CAMPBELL J.Y., LO W.A. and MACKINLAY A.C., 1997, The Econometrics of Financial Markets, Princeton University Press, Princeton New Jersey
BECCHETTI L., CICIRETTI R. and TRENTA U., 2007, Asset Pricing Models I: Equity Securities, in Il Sistema Finanziario Internazionale, Michele Bagella, ed.

Editor: Rocco CICIRETTI (march 2025)