Looking for Spot in the Presence of Futures
AbstractCustomers carrying out a costly search among dealers for the best bid or offer are unable to tell whether an unfavorable quote reflects a change in market fundamentals or whether they have met a high margin dealer. The optimal search strategy in the presence of a futures market is shown to have a reservation price property, where the reservation price depends on the current futures price. In equilibrium, dealers randomize their quotes in a way that coincides with searchers' expectations, yielding a self-fulfilling expectations equilibrium. This solution is consistent with optimal dealer behavior.
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Bibliographic InfoPaper provided by Trinity College Dublin, Department of Economics in its series Economics Technical Papers with number 973.
Date of creation: 1997
Date of revision:
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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