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On Speculation, Index Futures Markets, and the Link between Market Volatility and Investor Welfare

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  • Subrahmanyam, Avanidhar

Abstract

This paper develops a trading model that incorporates informed speculators as well as investors who possess incorrect expectations about asset values. It is shown that the introduction of an index futures market, by stimulating additional misinformed speculation, increases market liquidity and adversely affects price variability and efficiency in the underlying stock markets. An analysis of the welfare of uninformed hedgers suggests that the relationship between uninformed investor welfare and two key parameters that dominate policy discussions, market liquidity and price variability, is quite tenuous. Copyright 1996 by MIT Press.

Suggested Citation

  • Subrahmanyam, Avanidhar, 1996. "On Speculation, Index Futures Markets, and the Link between Market Volatility and Investor Welfare," The Financial Review, Eastern Finance Association, vol. 31(2), pages 227-263, May.
    • Handle: RePEc:bla:finrev:v:31:y:1996:i:2:p:227-63
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    Cited by:

    1. Yiuman Tse & Michael R. Williams, 2013. "Does Index Speculation Impact Commodity Prices? An Intraday Analysis," The Financial Review, Eastern Finance Association, vol. 48(3), pages 365-383, August.
    2. Chang, Charles & Lin, Emily, 2015. "Cash-futures basis and the impact of market maturity, informed trading, and expiration effects," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 197-213.

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