Interlinkage in the Financial Markets - Common Features
The interlinkage present in the financial markets is essentially due to the fact that all these markets are in the process of assisting the flow of funds. Some of the important common features are:
One of the prime unifying factor of the various financial markets is credit. Since all markets provide credit, borrowers and lenders can switch from one market to another seeking the most favorable credit terms. Such shifting of borrowings from one market to another may take place to reduce the credit costs.
Yet another common feature present in these markets relates to speculation. Investors in securities will get returns in the form of interest or capital gains in the long-term. Speculators in securities are always on the look out for speculative gains that can arise either due to certain market sensitive information or through their forecasts on certain future market developments. Such forecasts may be about interest rate movements, security prices, government policies, etc.
Arbitrage is the other unifying factor of the financial markets. Arbitrageurs take advantage of the price differentials existing between the markets. When the prices of securities in one market appear to be out of line with the other markets, arbitrageurs switch over to that market offering the best of prices. Thus, arbitraging enables transfer of funds from one market to another.
In spite of such linkages, the guidelines regulating the various sub-markets in few economies, however, insulate them to a certain extent from the influence of the other markets. Contrary to these economies are the free economies where the financial markets are freely accessible.