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On the Limits to Speculation in Centralized versus Decentralized Market Regimes

Author

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  • Felipe Zurita

    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

Speculation creates an adverse selection cost for utility traders, who will choose not to trade if this cost exceeds the benefits of using the asset market. However, if they do not participate, the market collapses, since private information alone is not sufficient to create a motive for trade. Therefore, there is a limit to the amount of speculative transactions that a given market can support. We compare this limit in decentralized versus centralized market regimes, finding that the centralized regime is more prone to speculation than the decentralized one: the transaction fees charged by an intermediary diminish the individual return to information, so that for a fixed value of trading, more speculative transactions can be supported. The analysis also suggests a reason for the existence of intermediaries in financial markets.

Suggested Citation

  • Felipe Zurita, 2001. "On the Limits to Speculation in Centralized versus Decentralized Market Regimes," Documentos de Trabajo 196, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:196
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    File URL: https://www.economia.uc.cl/docs/doctra/dt-196.pdf
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    References listed on IDEAS

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    Cited by:

    1. Germain, Laurent, 2005. "Strategic noise in competitive markets for the sale of information," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 179-209, April.
    2. Drew Fudenberg & David K Levine, 2005. "Learning and Belief Based Trading," Levine's Working Paper Archive 618897000000000975, David K. Levine.
    3. Jie Zheng, 2010. "Strong Bubbles and Common Expected Bubbles in a Finite Horizon Model," Levine's Working Paper Archive 122247000000002153, David K. Levine.
    4. Jie Zheng, 2008. "Strong Bubbles and Common Expected Bubbles in a Finite Horizon Model," Levine's Working Paper Archive 814577000000000038, David K. Levine.

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    More about this item

    Keywords

    Speculation; adverse selection; centralized markets;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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