The Role of Observability in Futures Markets

José Luis Ferreira

The B.E. Journal of Theoretical Economics, 2006, vol. 6, issue 1, 24

Abstract: Allaz (1992) and Allaz and Vila (1993) show that in an oligopolistic industry the introduction of a futures market that operates prior to the spot market induces more competitive outcomes. Hughes and Kao (1997) show that this result presumes that firms' future positions are perfectly observed, and that when firms' positions are not observed the Cournot outcome arises. We study an alternative formulation of observability, where the behavior of participants in the futures market is explicitly analyzed, and show that this approach leads to different results. Imperfect observability induces more competitive outcomes than Allaz and Vila's model.

Keywords: futures markets; observability; arbitrage; cournot competition (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (22)

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DOI: 10.2202/1534-598X.1266

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