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Interconnectedness of Markets & Market Dynamics
What does 'interconnectedness of markets' mean in the context of financial systems?
It refers to the interdependence among different financial markets—money, capital, forex, and derivatives—whereby disturbances in one market transmit quickly to others through price, liquidity, and sentiment channels.
What is 'market segmentation' and how does it hinder interconnectedness of financial markets?
Barriers that prevent capital from flowing freely across market segments.
How does contagion differ from spillover in financial markets?
Spillover is the normal transmission of shocks across markets, while contagion is an abnormal, excessive co-movement beyond what fundamentals justify, often driven by panic or herding behavior.
What is 'cross-market arbitrage' and how does it promote price efficiency across interconnected markets?
Simultaneously buying and selling across markets to exploit price differences.
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