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A Strategic Analysis Of Speculative Trade In A Two-Sided Asset Market With Information Diversity

Author

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  • BETTINA ROCKENBACH

    (University of Erfurt, Nordhäuser Str. 63, D-99089 Erfurt, Germany)

Abstract

Theimpossibility of speculative trade result(Milgrom and Stokey, 1982) provokes the questions why traders care about their private information, if they cannot profit from it and how the aggregate information can then be reflected in REE prices. This paper answers these questions by analyzing a speculative market as a game, which has the advantage of making the equilibrium strategies explicit. We introduce the new equilibrium selection concept ofbest reply resistance, which singles out those equilibria that remain an equilibrium even if opponent(s) deviate to a best reply. In the unique best reply resistant equilibrium of the two-player game trade at the REE price occurs each time both traders receive contradicting private information.

Suggested Citation

  • Bettina Rockenbach, 2005. "A Strategic Analysis Of Speculative Trade In A Two-Sided Asset Market With Information Diversity," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 151-170.
    • Handle: RePEc:wsi:igtrxx:v:07:y:2005:i:02:n:s0219198905000466
    DOI: 10.1142/S0219198905000466
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    More about this item

    Keywords

    Speculative trade; betting; game theory; JEL-Classification: C72; JEL-Classification: D44; JEL-Classification: D82; JEL-Classification: D84;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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