Changes in Financial Markets
CHANGES IN FINANCIAL MARKETS Financial markets have been revolutionized by innovation and information processing technology. Financial markets and the “real economy” are linked in new, complex ways. There are feedback effects. Much of the American and global financial sectors are unregulated. The recent financial crisis in the mortgage-backed securities market indicates that the usual Fed tools to fix financial problems no longer work. The Fed is improvising new policies. They may become the basis for wider regulation or oversight of capital markets. Since 1973, the year of the Black-Sholes equation to price options and the beginning of the Chicago Board of Options Exchange, the major changes in financial markets have been: • Increased liquidity. Lower cost and shorter time to turn assets into cash. • Securitization. Part of the innovation to make financial assets more liquid. • Variable-rate instruments. Among other effects, this shifts interest rate risk. • Usin...