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Capital Market Liberalization and Development$
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José Antonio Ocampo and Joseph E. Stiglitz

Print publication date: 2008

Print ISBN-13: 9780199230587

Published to Oxford Scholarship Online: May 2008

DOI: 10.1093/acprof:oso/9780199230587.001.0001

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Consequences of Liberalizing Derivatives Markets

Consequences of Liberalizing Derivatives Markets

(p.288) 11 Consequences of Liberalizing Derivatives Markets
Capital Market Liberalization and Development

Randall Dodd

Oxford University Press

This chapter analyses the consequences of growth and development of derivatives markets in developing countries in the context of deregulated financial markets. It discusses both the economic usefulness of derivatives, and the potential misuses and abuses that are facilitated by these financial instruments. The chapter also discusses certain public interest concerns with derivatives markets such as trading practices and the use of collateral (also known as margin). One of the most important concerns is the growth in risk taking in proportion to the amount of capital underlying such investments, and in turn this leads to large public concerns about the impact on financial sector and overall economic stability. The chapter concludes with a policy proposal that is designed to curtail if not eliminate these problems while encouraging the use of derivatives for productive purposes.

Keywords:   collateral, instability, fragility, prudential regulation, risk, capital requirements, fraud, manipulation

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