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Looking for Spot in the Presence of Futures

Author

Listed:
  • Krishna Ramaswamy
  • Patrick Waldron

Abstract

Customers 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.

Suggested Citation

  • Krishna Ramaswamy & Patrick Waldron, 1997. "Looking for Spot in the Presence of Futures," Economics Technical Papers 973, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduet:973
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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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