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Speculative Securities

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  • Rohit Rahi

    ()

  • José Marín

Abstract

A speculative security is an asset whose payoff depends 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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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp268.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp268.

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Date of creation: Jul 1997
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Handle: RePEc:fmg:fmgdps:dp268

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Web page: http://www.lse.ac.uk/fmg/

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  1. Rohit Rahi & James Dow, 1998. "Informed Trading, Investment, and Welfare," FMG Discussion Papers dp292, Financial Markets Group.
  2. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
  3. Jose Marin & Rohit Rahi, 1996. "Information Revelation and Market Incompleteness," Archive Working Papers 024, Birkbeck, Department of Economics, Mathematics & Statistics.
  4. Rahi, Rohit, 1996. "Adverse Selection and Security Design," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 287-300, April.
  5. Hara Chiaki, 1995. "Commission-Revenue Maximization in a General Equilibrium Model of Asset Creation," Journal of Economic Theory, Elsevier, vol. 65(1), pages 258-298, February.
  6. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  7. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  8. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
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Cited by:
  1. Jón Daníelsson & Bjørn Jorgensen & Casper Vries & Xiaoguang Yang, 2008. "Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation," Annals of Finance, Springer, vol. 4(3), pages 345-367, July.
  2. Instefjord, Norvald, 2006. "Forecasting risk, informed speculation, and financial innovation," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 67-85, January.
  3. Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
  4. Norvald Instefjord & Kouji Sasaki, 2008. "Informational leverage: the problem of noise traders," Annals of Finance, Springer, vol. 4(4), pages 455-480, October.

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