The Informational Role of Spot Prices and Inventories
We examine the role that spot markets and physical inventories play in revealing to uninformed traders the expectations of informed traders. Although many papers investigate potential mechanisms by which futures markets may disseminate such information, the role of spot markets has not been examined in comparable detail. Because the incentive for speculative trading in futures contracts stems from the failure of spot markets to eliminate differences in beliefs regarding future market conditions, the scope for speculative trading in the futures market is therefore determined, but also limited, by the extent to which spot market transactions disseminate private information. Using a rational expectations approach, we show that equilibrium differences in beliefs are determined by specific characteristics of the underlying commodity, including storage costs, the amplitude of unexpected demand and supply shocks, the accuracy of information acquired by informed investors, the numbers of informed and uninformed investors, and the elasticity of demand and supply.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
When requesting a correction, please mention this item's handle: RePEc:rff:dpaper:dp-12-45. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster)
If references are entirely missing, you can add them using this form.