Looking for Spot in the Presence of Futures

Krishna Ramaswamy () and Patrick Waldron
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Patrick Waldron: Postal: Department of Economics, Trinity College, Dublin 2, Ireland

Economics Technical Papers from Trinity College Dublin, Economics Department

Abstract: Customers carrying out a costly search among dealers for the best bid or offer are unable to tell whether an unfavorable quote reflects a change in market fundamentals or whether they have met a high margin dealer. The optimal search strategy in the presence of a futures market is shown to have a reservation price property, where the reservation price depends on the current futures price. In equilibrium, dealers randomize their quotes in a way that coincides with searchers' expectations, yielding a self-fulfilling expectations equilibrium. This solution is consistent with optimal dealer behavior.

JEL-codes: D83 G13 (search for similar items in EconPapers)
Date: 1997
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Journal Article: Looking for Spot in the Presence of Futures* (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduet:973

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