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Speculative Securities

Author

Listed:
  • 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.

Suggested Citation

  • Rohit Rahi & José Marín, 1997. "Speculative Securities," FMG Discussion Papers dp268, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp268
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp268.pdf
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    Citations

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    Cited by:

    1. is not listed on IDEAS
    2. Norvald Instefjord & Kouji Sasaki, 2008. "Informational leverage: the problem of noise traders," Annals of Finance, Springer, vol. 4(4), pages 455-480, October.
    3. Instefjord, Norvald, 2006. "Forecasting risk, informed speculation, and financial innovation," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 67-85, January.
    4. Shiyang Huang & Bart Zhou Yueshen, 2021. "Speed Acquisition," Management Science, INFORMS, vol. 67(6), pages 3492-3518, June.
    5. 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.
    6. Corina Haita-Falah, 2016. "Uncertainty and speculators in an auction for emissions permits," Journal of Regulatory Economics, Springer, vol. 49(3), pages 315-343, June.
    7. Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
    8. Dorn, Daniel & Strobl, Günter, 2023. "Rational disposition effects: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 153(C).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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