Credit risk adds a specific new risk variable since the change in valuation arising from changing economic conditions may be increased or decreased by changes in the probability of repayment. In fact, if the ability of the issuer is positively affected by changes in market values, the two types of risk may be highly positively correlated. In financial markets discuss the elements determining the bid-offer spread. Market makers may also benefits from economies of scale in their activities, larger trading volumes permitting lower spreads. In financial markets discuss the functions of market makers.
Markets reflect available information.
The prices they are prepared to transact at reflect the information known about the asset and help establish an equilibrium price they provide immediacy of execution. A statistical approach to risk management will be successful in capturing most of the stochastic behaviour of asset prices. As an approximation, the normal or lognormal distributions provide a reasonable description of the probabilities surrounding future outcomes. Departures from normality are a feature of financial markets. Markets become stressed and undergo significant value shifts over short periods of time.