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On the Possibility of Informative Equilibria in Futures Markets with Feedback

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  • Robert P Lieli
  • Augusto Nieto-Barthaburu

Abstract

We study the existence of equilibria and the information content of prices in futures markets where the probability of future payoffs can be altered by an intervening agent who acts in response to the market price, hence creating a feedback effect. We focus on the market with the simplest possible structure: traders betting on the occurrence of a future event by buying or selling Arrow-Debreu securities (one dollar claims contingent on a binary outcome). We find that in the presence of feedback: (i) a rational expectations equilibrium may not exist; (ii) the market price may decline in response to information that is ex-ante more favorable to the occurrence of the underlying event; (iii) an equilibrium that reveals no information may obtain. Thus, feedback from an intervening agent materially alters the way in which price responds to information, and potentially undermines the viability of the market itself.

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  • Robert P Lieli & Augusto Nieto-Barthaburu, 2020. "On the Possibility of Informative Equilibria in Futures Markets with Feedback," Journal of the European Economic Association, European Economic Association, vol. 18(3), pages 1521-1552.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:3:p:1521-1552.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz019
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    Cited by:

    1. Bergemann, Dirk & Ottaviani, Marco, 2021. "Information Markets and Nonmarkets," CEPR Discussion Papers 16459, C.E.P.R. Discussion Papers.
    2. Robert P. Lieli & Augusto Nieto-Barthaburu, 2023. "Forecasting with Feedback," Papers 2308.15062, arXiv.org, revised Jan 2024.

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