Transaction Cost and Asymmetric Information & Shadow Banking

Part I

Interaction Between Financial Intermediation Efficiency and Economic Growth, Efficient Portfolios in Financial Markets with Proportional Transaction Costs and A Model of Financial Structure and Financial Fragility articles.

Explain how financial markets and financial intermediaries manage the information costs that arise from asymmetric information.

Part II

The Shadow Banking System and Hyman Minsky’s Economic Journey (Links to an external site.) and Shadow Banking: Global Trends and Policy Developments (Links to an external site.) articles.

Determine why shadow banking has served a critical role in the market-based financial system. Compare and contrast the traditional banking system and the shadow banking system.

Sample Solution

Transaction Cost and Asymmetric Information & Shadow Banking

Financial markets exhibit asymmetric information in any transaction in which one of the two parties involved has more information than the other and thus has the ability to make a more informed decision. Economists say that asymmetric information leads to market failure. That is, the law of supply and demand that regulates the pricing of goods and services is skewed. The 2007 – 2008 subprime loan crisis was a classic example of the way asymmetric information can skew a market and cause market failure. The solution to the adverse selection problem in financial markets is to eliminate asymmetric information by providing the relevant information regarding borrowers (sellers of securities) to investors (buyers of securities). This can be done, by making public the clearing price for as many transactions as possible and the market will do its intended job of channeling the appropriate commodities to the people who want them at the right price.

Barthes (1964) enforced the concepts of language, or the part of the Semiological system which is consented upon by society, and speech, or the individual choice of symbols, to Semiological systems. The application of these concepts can be supplied to the Semiological study of the food system. According to Barthes (1964), someone is free to create his/her own menu, using personal choices in food mixtures, and this will become their speech or message. This is done with the overall national and social structures of the language of food mind. Barthes (1964) then spread on Saussure’s terms, by explaining that language is not really socially determined by the masses, but is sometimes decided by a certain minute group of persons, somewhat changing the correlation of language and speech. Barthes (1964) exact that a Semiological system can importantly exist in which there is language, but little or no speech. In this case, Barthes (1964) was of the believe that a third element called matter, which would provide signification would need to be added to the language/speech system.
Signifier and Signified
The signified was a representation of a concept, while the signifier was used to represent the sound-image of that concept. Barthes (1964) points out that the importance of both the signified and the signifier is the correlation that exists between them; it is within this relationship that sense is arrived at. “… that the words in the field derive their meaning only from their opposition to another (usually in pairs), and that if these oppositions are preserved, the meaning is unambiguous” (Barthes, 1964, p. 38). Out of the correlation, the sign is created. Saussure (1959) indicated the sign to be arbitrary in nature, initially based on the relationship between the signified and signifier. Barthes (1964) explained that the sign cannot be arbitrary forever when Semiological sys

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