The International Financial Market is the place where financial wealth is traded between individuals (and between countries). It can be seen as a wide set of rules and institutions where assets are traded between agents in surplus and agents in deficit and where institutions lay down the rules.
The financial market comprises the markets strictu sensu (stock market, bond market, currency market, derivatives market, commodity market and money market), the institutions which work in them with different aims and functions (Central Bank, Ministry of Economy and Finance, Monte Titoli, Borsa Italiana and CONSOB), as well as direct/indirect policies orientated to making the market the place (not necessarily a physical place and not necessarily ruled but regulated) where the exchange between surplus and deficit units is carried out as efficiently as possible.
With regard to policies, consideration must be given to those connected with monetary, fiscal and more structural policies, as well as those directly connected with the governance of the market itself.
Governance in the financial market can be defined as a set of rules useful in interconnecting the agents who operate within it and the institutions. These rules define the market.
Governance rules in a financial market can be defined at both a microeconomic and macroeconomic level.
Microeconomic rules deal not only with individuals (single money savers, professional agents, and companies) but also with the market itself and its microstructure. Macroeconomic governance rules deal with the market as a whole, but they are also strictly connected with policies regulating the market.
At a macroeconomic level, governance is important for the financial market in order to define every single rule of the trading process: from those which regulate the stock exchange or the Over The Counter (OTC) trades to those which define who can join the market. Moreover, great importance is given to the market microstructure, where microstructure is understood as the set of rules that makes and defines the asset exchange price. This is a main point in allowing the market to function properly. The liquidity/thickness/depth of the market depends on the price formation rules according to which the asset is traded off. At a microeconomic level, the steps to trade assets on the financial market are: listing, trading, and post-trading. The latter comprises clearing, settlement, and custody. From the market insiders’ point of view, each of these steps needs to be defined in order to conclude the exchange at a time and price previously defined. Each step has its own rules that allow those who operate in the financial market to establish their own strategy with respect to their specific expectations. The traded asset returns are linked to the definition of these rules. Each market has its own rules that deal with the microstructure. Different markets have different liquidity and this depends on the micro-rules that they themselves have established. These rules are relevant both for (official) exchange trading and for the OTC trading.
Another class of microeconomic governance rules are those which state, for instance, who can operate in the market and how. Microeconomic rules also concern the manner in which the institutions themselves operate in the market .
Macroeconomic rules of the financial market have a different task and are linked to the broad-spectrum policies of the market. These can indicate the required market institution, the market structure and furthermore its aims and its own monetary and fiscal policies. All these characteristics make the market unique with respect to the economy in which it works. One of the features of this uniqueness is market transparency. This characteristic is defined on the basis of (governance) rules, institutions, agents, and polices connected to it. The more people know how to complete the trading asset process, the more a market is transparent. In this manner, expectations become heterogeneous for individuals/agents and, at the same time, they reflect the information at hand, which is then elaborated depending on the different sell/buy strategies.
This leads to the definition of expectations. Defining the role of expectations in a financial market has a two-fold purpose. The first is defined at a macroeconomic level. Expectations are defined with respect to the policies and rules to be adopted in the market.
This leads to defining the sell/buy strategies on the basis of the role that, for instance, inflation will have in the subsequent period t+1 given the policies/rules defined in t. This kind of expectation may vary depending on the discretion that exists in defining the rules, not only at a macroeconomic level but also at a microeconomic one. The second objective is microeconomic. Agents formulate their expectations to predict asset price variations in order to determine the asset returns. This point leads back to the liquidity concept previously introduced. The different level of liquidity in the trading process determines a different formulation of expectations. In the same way, the diverse discretion utilised in setting macro-economic rules determines a different formulation of the expected inflation.
Macroeconomic rules, as previously defined, are connected to different monetary and fiscal policies. The financial market is subjected to policies that depend mostly on the regulating institutions. At the same time, institutions are responsible for defining rules and for enforcing the application of these rules in the market. The institutions determine the rules that in turn define their field of action.
Individuals who operate in one market have to follow these rules but, at the same time, their decision is based on the rules that a given market has set itself. Transparency, liquidity, and expectations help individuals to choose the market in order to maximise their own utility.
The financial market examined in this manner is an extremely complex system in which rules, individuals and institutions interact. This complexity increases even more in time and space (in the case of international financial markets). In time, financial markets cover an increasingly important role in the financial saving mediation of agents at an international as well as at a national level. In space, agents have instruments at their disposal that have become increasingly more complicated and specific. These instruments are utilised through the markets of reference (stock market, bond market, currency market, derivatives market, commodities market, money market) that are a fundamental part of the financial market. Each market has its own characteristics that in turn define the contexts in which agents operate on the basis of the risk associated to them.

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, Modelli di Asset Pricing I: Titoli Azionari, in Il Sistema Finanziario Internazionale, Michele Bagella, a cura di, Giappichelli, Torino.

Editor: Rocco CICIRETTI

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