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Optimal speculative trade among large traders

Eliaz, K.; Spiegler, R.; (2008) Optimal speculative trade among large traders. Review of Economic Design , 12 (1) pp. 45-74. 10.1007/s10058-008-0040-0.

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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.

Type: Article
Title: Optimal speculative trade among large traders
DOI: 10.1007/s10058-008-0040-0
Publisher version: http://dx.doi.org/10.1007/s10058-008-0040-0
Language: English
Keywords: Belief, information
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/17320
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