Capital Markets Training Seminar

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• Capital Markets Training Seminar
• December 2nd 2008, Paris
• Recent trends in the financial markets
• why is it serious?
• Alexandre Sokic
• Professor of economics and finance
• Ecole Supérieure du Commerce Extérieur
• Paris La Défense

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• Report
• Recent events in the financial markets are a
  serious concern
• They make the headlines of all media, are on the
  agenda of top governments meetings
• Simple question
• Why are we so sensitive to difficulties in
  financial markets?

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• Function of financial markets
• Structure of financial markets
• Overview of financial markets recent evolution
• Financial markets turmoil and the real economy

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• Function of financial markets
• Market on which exchanges of funds are performed
• Transfer of funds
• from people with excess of available funds to
  people with a shortage of funds

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• ? People spending less than their income have
  saved and are willing to lend funds (the
  savers-lenders)
• Principal savers-lenders are households
• ? People spending more than their income who must
  borrow funds to finance their spending (the
  spenders-borrowers)
• Principal spenders-borrowers are businesses and
  government

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• Funds flow from savers-lenders to
  spenders-borrowers via two routes
• ? direct finance
• borrowers borrow funds directly from lenders in
  financial markets by selling them securities
  (claims on the borrowers future income or
  assets)
• ? indirect finance
• Involving a financial intermediary that stands
  between savers-lenders and spenders-borrowers

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• Why is this channelling of funds from savers to
  spenders so important to the economy?
• The people who save are frequently not the same
  people who have profitable investment
  opportunities
• ? examples investment opportunity, buying a
  house project
• ? financial markets are critical for producing an
  efficient allocation of capital, contributing to
  higher production and the economic welfare of
  everyone in the society

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• 2. Structure of financial markets
• Debt and equity markets
• Funds can be obtained in a financial market in
  two ways
• ? issuing a debt security (bond)
• contract by which the borrower commits to pay
  the holder of the instrument fixed amounts at
  regular intervals (interest and principal) until
  a specified date (the maturity date)

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• ? issuing equities (common stock)
• claims to share in the net incomes (dividends)
  and the assets of a business (providing a right
  to vote)
• Advantages / Drawbacks
• An equity holder is a residual claimant the
  corporation must pay all its debt holders before
  it pays its equity holders
• Equity holders benefit directly from any
  increases in the firms profitability or asset
  value

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• Primary and secondary markets
• ? primary market
• financial market for new issues of a security
• Not well known to the public
• Involves an investment bank assisting in the
  initial sale of securities by underwriting
  securities (guaranteeing a price for a firms
  securities and selling them to the public)

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• ? secondary market
• Financial market to resold previously issued
  securities
• NYSE, NASDAQ, Euronext, LSE, FSE,
• Remark
• When someone buys a security in the secondary
  market the corporation that issued the security
  acquires no new funds

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• What are the functions of the secondary market?
• ? makes it easier and quicker to sell the
  securities to raise cash for the security holder
  increased liquidity makes them easier for the
  issuing firm to sell in the primary market,
• hence the issuing firm gets an easier access to
  new capital
• ? determines the price of the security that the
  issuing firm sells in the primary market
• The higher the securitys price in the secondary
  market, the higher the price that the issuing
  firm will receive for a new security in the
  primary market,
• and hence the greater amount of capital it can
  raise

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• 3. Overview of financial markets recent evolution
• Lets have a look at graphs!

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• 4. Financial markets turmoil and the real
  economy
• Main impact of bearish financial markets
• ? impact on the primary market ability to raise
  funds for firms, negative effect on investment

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• ? impact on households wealth negative wealth
  effect, negative effect on consumption and
  investment
• ? economic recession
• ? threatening pension systems(?)