Speculative Components of Market Quotations of Financial Assets

This study is concerned with financial asset pricing (including that in open trade), an issue that is widely discussed and hard to understand practically. To date, the global scientific thought has created a host of financial asset pricing models, some of which have become known worldwide (for instance, the CAPM model and its varieties), others have not, but the asset pricing and volatility formation mechanisms as well as parameter relationships in trading remain enigmatic.

The key element of this paper is a set of assumptions that simplifies the current situation in the stock market and enables the processes taking place therein to be formalized. The key assumption excluding any investment activity from the analysis is that no new information has come in the market during the analysis.

The main conclusions of the research: 1. The market quotation of any risk asset in free circulation in the market is a sum of values of two independent finance assets. The first one is the market's composite rating of the issuer's discounted cash flow. The second one is the value of the equivalent commercial loan which investors have to extend one another under a tacit term of investor admission to bidding (it is what is known as a Securities Credit, SC). 2. Apart from traditional definitions, the financial asset risk may also be defined as a difference between the actual return and the expected return on a financial asset, i.e. the return required to recover the balanced state of the market (zero asset volatility). 3. A financial asset's risk and return are not interrelated in speculative trading and thus the portfolio theory does not apply thereto. 4. If N of securities are circulating in the stock market, it means N 1 of finance assets are actually circulating in there. An additional asset is the Securities Credit. 5. If the mathematical expectation of return on speculation in financial markets is less than the current rate of return in the interbank credit market, a professional participant will close up his financial activities in financial markets and transfer his assets to the interbank market. 6. Financial markets provide the conditions for manipulative transactions when the mathematical expectation of return on speculative transactions goes below the current value of the interbank market return, with no funds flowing from the stock market to the interbank market. 7. The higher the dealer-estimated probability of success of his speculative strategy, the higher the risk he would be willing to assume (the higher quotation he would be willing to offer). 8. Information is not a mandatory component for the dealer to carry out speculative trading. Certainly he may use it but he is basically indifferent to the information flow. 9. The modern exchange trading system accepted globally, including Islamic countries, violates a few fundamental principles of Sharia and cannot be used in Islamic countries.

The paper is available here

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