The Asymmetric Information Of The Financial Market Essays

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The asymmetric information in the financial market
The imperfect nature of the financial market can be a cause of the crisis. In many economic models markets are assumed to be efficient, which is the demand and supply will match each other under the guidance of the price. Although there is nothing such as perfect market, the assumption of near perfect efficient market does stand for itself in some cases. For example, the food grain market and some raw material markets. However, the financial market may not be one of these near perfect markets for some reasons.
First of all, the flow of information is far from perfect in financial market compared to other markets. Asymmetric information can occur between credit suppliers and credit demanders. In the case of subprime mortgage crisis, the banks lacked of information of the repay ability and willingness of the mortgage applicants. This problem used to be addressed by credit score system. The credit score system can not only provide lenders’ historical information to creditors with reasonable cost, but also give the lenders an incentive of not intentionally defaulting. However, a subprime mortgages lost this safe guard because the requirement was set too low for an applicant. Applicants with a credit score lower than 500, which indicates a potential low ability to repay, can still apply for it. Since they had already got a low credit score, their incentive of not hurting credit record could be weaker than others’ whose credit…

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