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Speculative securities

Author

Listed:
  • Rohit Rahi

    (Department of Accounting and Finance and Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, U.K.)

  • José M. Marín

    (Department of Economics, Universitat Pompeu Fabra, Ramón Trías Fargas 25-27, E-08005 Barcelona, SPAIN)

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.

Suggested Citation

  • Rohit Rahi & José M. Marín, 1999. "Speculative securities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 653-668.
    • Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:653-668
    Note: Received: July 19, 1998; revised version: August 31, 1998
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    References listed on IDEAS

    as
    1. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
    2. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
    3. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    4. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    5. Rohit Rahi, 1996. "Adverse Selection and Security Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(2), pages 287-300.
    6. José M. Marín & Rohit Rahi, 2000. "Information Revelation and Market Incompleteness," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 563-579.
    7. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    8. Hara Chiaki, 1995. "Commission-Revenue Maximization in a General Equilibrium Model of Asset Creation," Journal of Economic Theory, Elsevier, vol. 65(1), pages 258-298, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Norvald Instefjord & Kouji Sasaki, 2008. "Informational leverage: the problem of noise traders," Annals of Finance, Springer, vol. 4(4), pages 455-480, October.
    2. Instefjord, Norvald, 2006. "Forecasting risk, informed speculation, and financial innovation," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 67-85, January.
    3. Shiyang Huang & Bart Zhou Yueshen, 2021. "Speed Acquisition," Management Science, INFORMS, vol. 67(6), pages 3492-3518, June.
    4. Jón Daníelsson & Bjørn Jorgensen & Casper Vries & Xiaoguang Yang, 2008. "Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation," Annals of Finance, Springer, vol. 4(3), pages 345-367, July.
    5. Corina Haita-Falah, 2016. "Uncertainty and speculators in an auction for emissions permits," Journal of Regulatory Economics, Springer, vol. 49(3), pages 315-343, June.
    6. Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
    7. Dorn, Daniel & Strobl, Günter, 2023. "Rational disposition effects: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 153(C).

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    More about this item

    Keywords

    Information revelation; Sunspots; Security design; Futures contracts; Trading volume.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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