Capital market

Differentiation between money, capital and credit markets

The capital market is the sub-market of the financial market where the medium and long-term capital requirement meets the capital supply. Short-term transactions take place in the money market .

General

The compound “capital market” is made up of the homonym “capital” and market . Under capital is not the factor of production to understand, but in this market as commercial properties medium serving or long-term financing instruments . Market participants are all economic entities ( private households , companies , the state and its subdivisions (such as public administration and state-owned companies or municipal companies ). They act as capital providers ( investors ), financial intermediaries ( credit institutions , insurance companies , investment funds ) or borrowers . Commercial objects are specifically medium or Long-term loans ( investment loans , municipal loans ), loans ( mortgage loans , real estate financing ) or mezzanine capital ( credit market ), bonds of all types ( bond market ), stocks and participation certificates or profit participation certificates ( stock market ). The price on the capital market is generally the capital market interest rate , which however because of the diversity of financial products no single interest rate is. As market interest the act on bonds issue yield ( primary market ) or the current yield ( secondary market ) in shares, the dividend yield in loans from the loan rate . De The stock exchanges are the only organized capital market .

The capital market differs from the money market primarily in the maturity of the objects of sale. This classification was introduced in 1909 by the economist Arthur Spiethoff . On the capital market, it concerns terms or maturities of more than four years, whereby the differentiation is made differently. The medium term (2–4 years) is assigned to either the money market or the capital market in specialist literature . The capital market is often also narrowed to the securities market , which includes both dividend stocks, such as stocks, and fixed-income securities such as bonds.

Capital supply and demand

Credit market / capital market players

The capital supply comes from investors who are ready to make their capital available for the long term for the purpose of building financial assets . On the one hand, these are those investors who were ready to do so from the outset ( savers ) and, on the other hand, those investors for whom the money market interest rate appears too low on the money market. In the case of the latter, your investment decision has a negative effect on the supply of money on the money market and increases the supply of capital on the capital market. If the capital supply increases with a given capital demand, the capital market interest rate falls and vice versa. The marginal yield decreases for the capital provider with increasing capital supply. The level of the capital market interest rate is on the one hand a signal for the scarcity , on the other hand it is always a risk measure for the credit risk associated with the provision of capital . If the capital supply comes from abroad , one speaks of capital import .

As capital demand coming public sector ( municipal bonds , municipal bonds ), the private sector ( industry : investment loans ; real estate industry : residential , commercial real estate ) and private households ( real estate financing ) into consideration. Demanders of capital will only invest when the marginal efficiency of capital exceeds the current market interest rate. If the capital market rate rises above the marginal efficiency of capital, the demand for capital falls and vice versa. If the demand for capital increases with a given capital supply, the capital market interest rate also increases and vice versa. Foreign capital demand leads to capital export .

Market equilibrium

The capital market is in market equilibrium when the macroeconomic capital supply corresponds to the macroeconomic capital demand : ${\displaystyle K_{A}}$ ${\displaystyle K_{N}}$

${\displaystyle K_{A}=K_{N}}$

The long-term market equilibrium is established when the capital intensity (capital endowment per capita) no longer changes. If the capital market is in equilibrium, savings and investments balance out at the equilibrium interest rate . A high capital market interest rate can stimulate private households to invest capital (at the expense of consumption) and thus contribute to reducing the interest rate through a higher capital supply and vice versa.

The task of intermediaries is to facilitate the balance between the supply and demand of capital by carrying out transactions in the payment flows of the buyers and providers of capital, improving the level of information and supporting transaction processing.

Functions of capital markets

A distinction must be made between the allocation, information and evaluation functions:

• The allocation function concerns the distribution of capital supply and demand. The allocation of capital is considered to be efficient if those demanders of capital receive the financing available who can achieve the highest benefit with the capital employed . The efficiency benchmark is the capital market rate.
• The information function is of crucial importance for the functionality of the capital markets because market participants have to make their decisions on the basis of available information . Providers of capital must have access to information about their credit risk, for example through the annual financial statements of the capital seeker.
• The valuation and price setting function unfolds above all on stock exchanges, where stock exchange prices ( share prices or bond prices) reflect the future success of the issuer . OTC financial contracts are by rating agencies or credit institutions ( credit check ) as well as the risk classes rated the financial contracts.
• The coordination function ensures that the decentralized and mostly not harmonizing economic plans of the capital market participants are brought into harmony as far as possible.
• Individual protection : This protective function gives the investors protection against other participants who want to gain an advantage with information advantages at the expense of the investors.

Transformation functions

A distinction is made between quantity transformation, maturity transformation, lot size transformation and risk transformation.

Set transformations

The quantity transformation comprises the accumulation of the savings formed in an economy and their distribution to the investors in the desired maturity and quantity.

Maturity transformation

The maturity transformation enables the balancing of the deadlines between investors and investors. This is the period during which a loan is drawn by an investor and the period that elapses before a saver makes his financial resources available. These deadlines usually differ from one another.

Lot size transformation

The batch sizes transformation enabled by a merge of multiple lenders a match, the requested by the borrower amounts which could not provide a single investor.

Risk transformation

A risk transformation takes place in the capital markets when financial intermediaries between market participants come with different risk and the default risk change. Risk transformation gives savers the option of hedging or spreading their credit risk . In this way, insecure payment flows can be converted into secure payment flows. For example, risks can be converted by fluctuating exchange rates.

history

Development of the capital markets

→ Main article : “History” in the article Financial Crisis

Marcus Tullius Cicero reported in 66 BC that a financial crisis in the province of Asia also infected Rome because of its interdependencies: “This credit system and these financial transactions, which are carried out in Rome at the forum , are closely intertwined with those funds in Asia".

In the late Middle Ages , between the second half of the 14th century and the end of the 15th century, the prevailing precious metal shortage and the resulting monetary contraction led to a liquidity crisis . European production of precious metals dried up, the mints reduced their production or even stopped it completely. The supply of money became scarce because the credit supply was also based on the precious metal stocks. The reason was not only the lower supply of precious metals, but also the hoarding of coins. Between 1331–1340 and 1491–1500, the decline in European coin production was estimated at 80%.

Institutionally, capital markets began with the establishment of stock exchanges. The Antwerp Stock Exchange started regular trading in bonds in 1532, including Dutch court letters ( government bonds ), private bonds of the Dutch state officials and magnates (for the account of the government), bonds of the Dutch provincial estates, city bonds, rentier letters and bonds of the English crown and the King of Portugal. The first stock exchange came into being with the Amsterdam Stock Exchange ( Dutch Amsterdam beurs ) in 1612. It is considered to be the first stock exchange that enabled permanent stock trading in the 17th century. This was followed by stock exchanges in Königsberg (1613), Lübeck (1614), Frankfurt am Main (1615) and Leipzig (1635), which initially only traded in bills of exchange and sorts .

Vienna Stock Exchange - Black Friday on May 9, 1873

One of the first capital market crises was the founder crash , which first led to major price losses on the Vienna Stock Exchange on May 5, 1873 , where the price falls on May 9, 1873 ( Black Friday ) reached their preliminary climax. The crisis was carried over to the German Reich as the Great Depression , primarily through the contagion effect .

The economist Rudolph Eberstadt obtained his material for his monograph from 1901 on the German capital market mainly through direct inquiries from the city administrations. He pointed out here that the “permanent weakness of the German capital market, the inability to raise the necessary capital for productive purposes, may be due to the claims of land debt [mortgage loan, i. Ed.]… Be adequately explained ”. Eberstadt's reference was made at a time when the capital markets were underdeveloped and even less explored.

Classical capital market theory

→ Main article : capital market theory

The systematic studies of capital markets began in economics with the emergence of capital market theories. The classical capital market theory analyzes which securities prices or securities yields adjust themselves in the market equilibrium on a perfect capital market. It is based on the principle that there is a linear relationship between risk and return , according to which higher returns can only be achieved through higher risk. It assumes the existence of a perfect capital market .

Harry Markowitz developed the classical capital market theory in 1952. James Tobin applied the Markowitz model in 1958 when developing his money demand theory . He expanded the classic theory to include the possibility of a risk-free capital investment. In 1964, William F. Sharpe defined the risk of an investment solely as its statistical volatility , i.e. the extent of fluctuations in stock exchange prices. In 1965, Jack Treynor contributed to the further understanding of the Capital Asset Pricing Model (CAPM) with the key figure named after him, the Treynor quotient . In 1966, Jan Mossin completed the CAPM that was created, which is considered the most important pricing model on the capital market.

Eugene Fama developed the concept of market efficiency in 1970 . Accordingly, a market is efficient when its market prices reflect all available information. Robert C. Merton expanded the CAPM in 1973 by working on the Black-Scholes model for the valuation of financial options. By Stephen Ross developed in 1976 arbitrage pricing theory demands, unlike the CAPM no market equilibrium, but merely an arbitrage-free securities market.

Neoclassical capital market theory

The neoclassical capital market theory is based on the by John von Neumann and Oskar Morgenstern developed in 1944 expected utility theory to the expectation maximize their risk utility function when acting rationally actors. It forms the basis of rational action when making decisions under risk . She postulates that if the preference of a decisive actor with regard to risky alternative courses of action fulfills the axioms of completeness, continuity and independence, a utility function exists whose expected utility reflects the preference.

Capital market imperfection

Both the classics and the neoclassical capital market theory initially assume the ideal-typical state of perfect capital markets. In reality, however, there is a capital market imperfection due to transaction costs , information asymmetries , limited rational behavior, liquidation costs and non- risk-diversified portfolios .

Distinguishing criteria

Capital markets are differentiated on the basis of the degree of organization and the division into primary or secondary markets.

Main segments

In practice, the capital market is divided into two main segments, the primary market and the secondary market . The primary market provides information about the issuer and its financial product and is therefore of particular importance for investors. The secondary market comprises the execution and settlement of securities transactions. The primary market deals with the supply of newly issued securities that are to be requested by investors. This market is also known as the issue market , as this segment is understood to mean the initial placement of shares and bonds during the course of the issue. The secondary market, also known as the circulation market , comprises securities trading between market participants, i.e. the resale of newly issued securities by the first buyer to the new investor. The most famous place of the secondary market are the stock exchanges .

Level of organization

With regard to the degree of organization , a distinction is made between organized markets and unorganized markets .

Organized Markets

A highly organized capital market, such as the market organized on an exchange, is characterized by cost-effective, fast, secure and state-approved transactions that can be traded at any time . The stock exchanges, such as the Frankfurt Stock Exchange , are the most highly organized capital markets in the world. The organized capital market is subdivided into the stock and bond markets, issuing markets and markets for promissory note loans .

Unorganized markets

The free capital market and interbank trading , on the other hand, have a very low level of organization with only a few market regulations . There mainly transactions take place without the involvement of banks, stock exchanges and insurance companies, which are mostly insecure and unmanageable. The least organized market in Germany is known as the gray capital market , where, for example, the focus is on trading shares in real estate funds .

Theoretical models

Both in economics and in business administration , attempts are made to depict the above-mentioned characteristic features using models. In particular, the theoretical constructions of the perfect and imperfect capital market are used.

It is characteristic of this simplified theoretical model of the perfect capital market that the objects of trade on the market are homogeneous and there is complete market transparency . The possibilities for raising and investing capital are unlimited. The participants of the market can react quickly to changes in volume and price, as there are no time delays ( English time lags ) are. In the perfect capital market, there is no distinction between equity and debt , which means that there is only one uniform and constant market interest rate . These assumptions are gradually adapted to reality.

One speaks of an imperfect capital market (also called imperfect capital market ) if at least one of the preceding assumptions is not fulfilled.

A complete capital market is used when the entire state space can be mapped through linear combinations of the traded payment flows ( securities ) .

literature

• Stefan Wilhelm: Capital market models , in writings of the Institute for Finance Vol. 3, University of Leipzig, 2001.
• Manfred J. Matschke / Thomas Hering / Heinz E. Klingelhöfer: Financial analysis and financial planning , 1st edition, Munich: Oldenbourg-Verlag, 2002.
• Wolfgang Kürsten / Bernhart Nietert (eds.): Capital market, corporate finance and rational decisions , Springer, 2006, ISBN 978-3-540-27691-3 .

See also

• Capital market law

Individual evidence

1. ^ Arthur Spiethoff, The external order of the money and capital market , in: Gustav von Schmoller (Ed.), Yearbook for Legislation, Administration and Economics in the German Empire, Issue 2, 1909, pp. 17 ff.
2. ↑ Joachim von Spindler , Geldmarkt - Kapitalmarkt - Internationale Kreditmärkte , 1960, p. 34
3. ^ Karl Friedrich Hagenmüller , Capital Market , in: Handwortbuch der Betriebswirtschaft, Volume II, 1962, Sp. 3008
4. ↑ Leif Steinhauer, The Objectification of Capital Market-Oriented Value Reporting , Volume 13, 2007, pp. 10 ff.
5. ↑ Rüdiger Diedrigkeit, Atlas money and securities: commercial banks with cash and securities , 1987, p 258
6. ↑ Bernhard Felderer / Stefan Homburg, Macroeconomics and New Macroeconomics , 1989, p. 110 f.
7. ↑ Dietmar Wellisch, Public Finance III: Public Debt , 2014, p. 18
8. ↑ Dietmar Wellisch, Finanzwissenschaft III: Staatsverschuldung , 2014, p. 19
9. ↑ Anja Benker, Advantages and Disadvantages of a Capital Market-Oriented Management , 2008, p. 9 ff.
10. ↑ Viktor O. Ledenyov, Dimitri O. Ledenyov: Forecast in capital markets . LAP LAMBERT Academic Publishing, Saarbrücken 2016, ISBN 978-3-659-91698-4 .
11. ↑ Viktor O. Ledenyov, Dimitri O. Ledenyov: Investment in capital markets . LAP LAMBERT Academic Publishing, Saarbrücken 2017, ISBN 978-3-330-05708-1 .
12. ↑ Viktor O. Ledenyov, Dimitri O. Ledenyov: Business cycles in economics . LAP LAMBERT Academic Publishing, Düsseldorf 2018, ISBN 978-613-8-38864-7 .
13. ↑ Viktor O. Ledenyov, Dimitri O. Ledenyov: Money investment time . LAP LAMBERT Academic Publishing, Düsseldorf 2018, ISBN 978-613-9-85998-6 .
14. ^ Ulrich Pape: Fundamentals of Financing and Investment . 2015, p. 11.
15. ↑ Ulrich Pape: Fundamentals of Financing and Investment , 2015, p. 12.
16. ↑ Ulrich Pape: Fundamentals of Financing and Investment , 2015, p. 11 f.
17. ↑ Karl Häuser: Kapitalmarkt , in: Wolfgang Gehrke (Hrsg.): Handwörterbuch des Bank- und Finanzwesens , 1995, p. 1124.
18. ↑ Leif Steinhauer: The Objectification of Capital Market-Oriented Value Reporting , Volume 13, 2007, p. 11 ff.
19. ↑ Werner Ehrlicher: Kompendium der Volkswirtschaftslehre , 5th edition, 1975, p. 386.
20. ↑ Armin Varmaz: Profitability in the banking sector, identification, quantification and operationalization of value-driving factors , 1st edition, 2006, pp. 20 ff.
21. ↑ Anja Benker: Advantages and disadvantages of a capital market-oriented corporate management , 2008, p. 8 ff.
22. ↑ Marcus Tullius Cicero, De Imperio Cn. Pompei , 19th
23. ↑ Michael North, A Little Story of Money , 2009, p. 38
24. ↑ John Day, The question of Monetary Contraction in Late Medieval Europe , 1981, p. 20
25. ↑ Richard Ehrenberg, Die Weltbörsen und Finanzkrisen des 16. Century , 1922, p. 26 ff.
26. ↑ Pravir Malik, Redesigning the Stock Market , 2011, o. P.
27. ↑ Horst Gericke, The stock exchange admission of securities , 1961, p. 107
28. ↑ Rudolph Eberstadt, Der deutsche Kapitalmarkt , 1901, p. 236
29. ^ Harry Markowitz, Portfolio Selection , in: Journal of Finance, Vol. 7, 1952, pp. 77 ff.
30. ↑ James Tobin, Liquidity Preference as a Behavior Towards Risk , in: Review of Economic Studies, Vol. 26, 1958, pp. 65 ff.
31. ^ William F. Sharpe, Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk , in: Journal of Finance, Vol. 19, September 1964, pp. 425 ff.
32. ^ Jack Treynor, How to rate management of investment funds , in: Harvard business review 43.1, 1965, pp. 63 ff.
33. ^ Jan Mossin, Equilibrium in a Capital Asset Market , in: Econometrica, Vol. 34, October 1966, pp. 768 ff.
34. ^ Eugene Fama, The Behavior of Stock Market Prices , in: Journal of Business, January 1965, p. 34 ff.
35. ^ Robert C. Merton, A intertemporal Capital Asset Pricing Model , in: Econometrica, September 1973, pp. 867 ff.
36. ↑ Stephen Ross, The Arbitrage Theory of Capital Asset Pricing , in: Journal of Economic Theory, December 1976, p. 343 ff.
37. ^ Oskar Morgenstern / John von Neumann, Theory of Games and Economic Behavior , 1944, p. 1
38. ^ Günter Bamberg / Adolf Gerhard Coenenberg, Business Decision-Making , 1996, p. 74
39. ↑ Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance ff, 2000, p. 1857
40. ↑ Holger von Daniels, Private equity secondary transactions: Opportunities and limits of building an institutionalized secondary market , 1st edition, 2004. P. 78 ff.