Speculative securities

Rohit Rahi () and Jose Marin ()

Economic Theory, 1999, vol. 14, issue 3, 653-668

Abstract: A speculative security is an asset whose payoff depends in part on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is a poorer hedge against their endowment risks at the time of trade, and has an associated adverse selection cost. In the specific institutional setting of innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security even when all traders favor it.

Keywords: Information revelation; Sunspots; Security design; Futures contracts; Trading volume. (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 1999-10-14
Note: Received: July 19, 1998; revised version: August 31, 1998
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Working Paper: Speculative Securities (1997)
Working Paper: Speculative securities (1997)
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