Paper #223

Title:

Speculative securities

Authors:

José M. Marín and Rohit Rahi

Date:

April 1997

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 a poorer hedge against their endowment risks as 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.

Keywords:

Information revelation, sunspots, security design, futures contract, trading volume

JEL codes:

D82, G14

Area of Research:

Finance and Accounting

Published in:

Economic Theory, 14, pp. 653-668, 1999

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