Optimal speculative trade among large traders |
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Authors: | Kfir Eliaz Ran Spiegler |
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Institution: | (1) Department of Economics, Brown University, Providence, RI 02912, USA;(2) Department of Economics, University College London, Gower St., London, WC1E 6BT, UK |
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Abstract: | A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to
engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative
trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders’ gains from
speculative trade, subject to the incentive constraints that result from the traders’ ability to manipulate market prices.
Within a stylized market model, we show that this mechanism affects price volatility without destroying ex-post efficient
allocations. We also characterize the implementability of optimal speculative trade when the traders’ prior beliefs are private
information.
Financial support from the US-Israel Binational Science Foundation, Grant No. 2002298 is gratefully acknowledged. |
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Keywords: | Speculative trade Heterogeneous beliefs Mechanism-design Partnership dissolution |
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