What do the souk in Marrakesh and the global fixed income market have in common?
Price discovery, says Chris Iggo, chief investment officer of fixed income at AXA Investment Managers.
There are no fixed prices in the souk. In order to transact, one has to “discuss” the price with the trader, says Iggo. Unless you are very naive or just not very good at bargaining, the final price is always very much lower than the initial gambit.
When his son wanted a pair of training shoes, the trader — sensing an easy win — originally quoted 1,700 dirhams (£140). They eventually settled on a price of 200 dirhams (£8).
The concept of assymetric information is key here — what the trader knows but the passing customer doesn’t know is the cost structure of the goods on show.
Price discovery remains difficult in the corporate bond market as a result of the problem of asymmetric information. Bond prices are low because the bond holder does not know whether the issuer is going to repay the debt at par as scheduled or not.