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research articles : Speculative securities

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Author Info
Rohit Rahi () (Department of Accounting and Finance and Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, U.K.)
José M. Marín () (Department of Economics, Universitat Pompeu Fabra, Ramón Trías Fargas 25-27, E-08005 Barcelona, SPAIN)

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Abstract

A speculative security is an asset whose payoff depends in part on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is a poorer hedge against their endowment risks at the time of trade, and has an associated adverse selection cost. In the specific institutional setting of innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security even when all traders favor it.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 14 (1999)
Issue (Month): 3 ()
Pages: 653-668
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Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:653-668

Note: Received: July 19, 1998; revised version: August 31, 1998
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Related research
Keywords: Information revelation; Sunspots; Security design; Futures contracts; Trading volume.;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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