Speculation and Hedging in Segmented Markets

Itay Goldstein, Yan Li and Liyan Yang

The Review of Financial Studies, 2014, vol. 27, issue 3, 881-922

Abstract: We analyze a model in which traders have different trading opportunities and learn information from prices. The difference in trading opportunities implies that different traders may have different trading motives when trading in the same market—some trade for speculation and others for hedging—and thus they may respond to the same information in opposite directions. This implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps. Our model is relevant to various realistic settings and helps to understand a variety of modern financial markets.

Date: 2014
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