Risk, Speculation, and OTC Derivatives: An Inaugural Essay for Convivium

Lynn A. Stout
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Lynn A. Stout: University of California, Los Angeles

Accounting, Economics, and Law, 2011, vol. 1, issue 1, pages 2

Abstract:

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.

Keywords: speculation; derivatives; risk; hedging; information; arbitrage; disagreement; heterogeneous beliefs; CDS (search for similar items in EconPapers)
JEL-codes: D53 D82 D84 G01 G28 K20 B10 C70 D14 (search for similar items in EconPapers)
Date: 2011
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