Speculative securities

José Marín and Rohit Rahi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A speculative security is an asset whose payoff depends 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 poorer hedge against their endowment risks at the time of the trade, and has an associated adverse selection cost. In the specific institutional setting innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security when all traders favour it.

Keywords: information revelation; sunspots; security design; futures contract; trading volume (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Pages: 21 pages
Date: 1997-04-28
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119175

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