Looking for Spot in the Presence of Futures
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.
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|Date of creation:||1997|
|Date of revision:|
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