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Risk, Speculation, and OTC Derivatives: An Inaugural Essay for Convivium

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  • Stout Lynn A.

    (University of California, Los Angeles)

Abstract

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.

Suggested Citation

  • Stout Lynn A., 2011. "Risk, Speculation, and OTC Derivatives: An Inaugural Essay for Convivium," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 1(1), pages 1-15, January.
  • Handle: RePEc:bpj:aelcon:v:1:y:2011:i:1:n:2
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    Cited by:

    1. Yuri Biondi & Simone Righi, 2016. "What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 11(2), pages 175-203, October.
    2. Creti, Anna & Joëts, Marc & Mignon, Valérie, 2013. "On the links between stock and commodity markets' volatility," Energy Economics, Elsevier, vol. 37(C), pages 16-28.
    3. Carruthers Bruce G., 2015. "Isabelle Huault and Christelle Richard: Regulation Writ Large: A Comment on Huault and Richard’ “The Discreet Regulator”," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 5(2), pages 227-232, July.
    4. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.
    5. Fantacci Luca, 2013. "Why Banks Do What They Do. How the Monetary System Affects Banking Activity," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 3(3), pages 333-356, November.
    6. Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.
    7. Biondi Yuri, 2016. "Empowering Market-Based Finance: A Note on Bank Bailouts in the Aftermath of the North Atlantic Financial Crisis of 2007," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 6(1), pages 79-84, March.
    8. repec:spr:fininn:v:3:y:2017:i:1:d:10.1186_s40854-017-0060-2 is not listed on IDEAS
    9. repec:bpj:aelcon:v:7:y:2017:i:3:p:29:n:2 is not listed on IDEAS

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