Research On Inherent Risks In Financialasset Innovations On Capital Market Efficiency

Several studies have been conducted in the field of financial risk management, However with the recent shocks emanating from the American real estate mortgage crisis in 2008, Financial risk management has taken a centre stage in research among scholars as well as policy makers. It's upon this background and motivation that this research is conducted in comparing the financial assets of both china and Uganda. In this study, the researcher examines the relationship that exists between financial assets'innovation and capital market efficiency. In examining this relationship, the researcher examines the serial correlations of stock prices on the securities exchange and their sensitivity to the magnitude of prices.In order to test market efficiency, the researcher opted to use the weak form level efficiency because most markets globally tend to exhibit the weak form tendencies. Even the most developed markets are not all that perfect because prices of securities do not really reflect the information in the market. Therefore base on this, the researcher addresses the issue of asset pricing in both the Uganda and Chinese securities Exchanges. In an efficient market price of financial asset fully and correctly reflect all the available and relevant information and the securities prices adjust instantaneously to new information coming into the market.In any investment process, investors are motivated by two main things. One is the rate of return and secondly the level of risk involved in that particular asset he or she is intending to invest in. However in the modern times, financial assets in the market have become complex and integrated, it has become complex and professional to be able to determine the level of risk in an asset as well the level of expected returns on that particular investment. Therefore to be able to estimate the risk and return on the market, certain models have to be applied to estimate the risk and return margins of financial assets in the market. Much as such models have been applied to estimate risk appetites across several financial assets, financial assets have often not reflected their true market values thereby having inherent risk on investments. It's often agreed that financial asset markets ought to be efficient (price of an asset must reflect its true value). Therefore in the face of markets being efficient, there are challenges that have coursed this inefficiency through noise trading hence generating a profile of risk which could be contagion in nature among financial assets. Therefore having observed the nature of trading, this study focused on a comparative analysis of financial asset trading patterns in the P.R. China with the main focus being placed on assets traded on Shenzhen and Shanghai markets and Uganda with focus on Uganda Securities Exchange. From the study the Chinese market capitalization was seen to be way larger than the Ugandan market capitalization. The study reveled both markets experiencing shocks on asset values, internally from the large volumes traded as in the case of Shanghai and Shenzhen stocks where the volumes of traded financial assets were having an effect on the value of individual assets. However this effect was observed to be minimal with the Ugandan financial assets. It was mainly due to the small volumes traded at the Uganda Securities Exchange. Such shock have also been observed to be emanating from the practice of several companies cross listing in several markets either within or outside the home country. As a result this has created a conducive environment for inherent and contagion risk to breed. This study however has analyzed the correlation of financial asset prices to other factors such as cross listings, volume of trade, market capitalization only to mention but a few. A patter emerged among these variables which made this study worthwhile.Therefore this study brought forth some innovative ways to approach the markets and attain efficiency. However it must be noted that much as the innovation may be put forth, risk is one variable that can only be reduced to acceptable levels and these levels vary from one investor to another. The study however made three main discoveries;I) The primary goal of every market is to become efficient, however this state of efficiency is difficult to attain due to some trades who take advantage of other to outdo the market. Such traders who try to outperform the market come to be known as noise traders due to their speculative nature of business. Therefore though this study, the researcher has been able to find out that in order to have an efficient market there is need to match risk against a standard measure. This ensures that all financial assets are guarded against bubbles in the market place ?) Market volatility is one of the common phenomenons on the market today due to noise trades and market speculators. This volatility breeds risk profiles on investment portfolios. However, from this study it reveals that as more players join the market, there is bound to be high instability on the market and uncertainty. It's upon this that this research has modeled innovatively to classify assets according to their toxicity using a toxic scale. This innovation can enable policy makers keep an eye on strategic investment assets that breed contagion risk. It's important to note however that such an innovation is based and built on Value at Risk (VaR) principles. With this innovation in place, policy makers can be able to monitor and maintain stability of financial assets prices.III) Since risk on investment is one variable we can no eliminate completely and also, however it can only be reduced to acceptable levels for investors. This stud has however revealed that risk as a variable is bound to occur and affect investment returns for several market players depending on the positions they take on the market. Based on this back ground, the researcher has revealed the need for a stimulus pool of funds to cushion contagion risk in case it occurred. Such pool of funds would also be used to stabilize financial asset prices to protect and safeguard investors. This action guarantees investors'confidence on the market. This pool of funds is however contributed as a legal requirement for all market players.Therefore this study has accomplished all the desired objectives. The innovations brought forward in this study will help investors, policy makers as well as researchers look at market efficiency in a new light and extend the frontier of knowledge as far as financial risk management is concerned...