A Strategic Analysis Of Speculative Trade In A Two-Sided Asset Market With Information Diversity
The impossibility 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 of best 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.
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Volume (Year): 07 (2005)
Issue (Month): 02 ()
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