Optimal speculative trade among large traders

Kfir Eliaz*, Ran Spiegler

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)45-74
Number of pages30
JournalReview of Economic Design
Volume12
Issue number1
DOIs
StatePublished - Apr 2008
Externally publishedYes

Funding

FundersFunder number
United States-Israel Binational Science Foundation2002298

    Keywords

    • Heterogeneous beliefs
    • Mechanism-design
    • Partnership dissolution
    • Speculative trade

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