NEW FINANCIAL INSTRUMENTS AND THE TRANSPARENCY OF MARKET INFORMATION

Janusz Kudła

DOI: http://dx.doi.org/10.12775/EiP.2010.014

Abstract


Modern financial instruments such as: structured notes, leases (in particular consumer leasing), securitization with the use of special investment funds and exotic foreign exchange derivatives contain an important systemic risk that is not properly perceived by investors and even perhaps is consciously hidden by financial institutions. The article identifies these hidden risk and their reasons, pointing primarily to the asymmetry of information and conflicts of interests between investors and financial institutions. The latter are willing to avoid the risk or to offer new financial instruments with small profitability, if investors take a decision without proper knowledge of the incurred risks of financial instruments. Unfortunately, the existing asymmetry of information means that investors typically are not in a position to properly assess the expected benefits or they are not able to assess the risk posed by financial investments. These problems mainly stem from informational barriers related to perception of risks by investors buying modern financial instruments. These phenomenon cause: economic inefficiency, increased transaction costs in the economy rather than their decrease, incorrect allocation of savings and significant increase of systemic risk.


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