Speculative Securities

Publication Date
Financial Markets Group Discussion Papers DP 268
Publication Authors

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 poorer hedge against their endowment risks at the time of the trade, and has an associated adverse selection cost. In the specific institutional setting innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security when all traders favour it.