Speculative dynamics

Dan Bernhardt, P. Seiler, B. Taub

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

We develop a method for solving for equilibrium outcomes in stationary strategic settings in which speculators are informationally large and understand how their actions affect the information content of prices. This allows us to characterize speculation by institutional investors who receive private long-lived information on a recurring basis, and trade strategically. When the underlying asset value process has a stationary autoregressive structure, we develop a contraction mapping argument to solve for the stationary linear equilibrium. We derive analytically and numerically how the characteristics of private information-its quantity, persistence and correlation, and division among speculators-affect trading profits, pricing and trading strategies. Our central finding is that what matters for equilibrium outcomes are the most recent signals that speculators receive. Speculators trade so much more aggressively on new information than old that the bulk of their profits come from their two or three most recent private signals. Trading on past prices drops off faster yet; effectively only the most recent price matters.

Original languageEnglish (US)
Pages (from-to)1-52
Number of pages52
JournalEconomic Theory
Volume44
Issue number1
DOIs
StatePublished - Jul 1 2010

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Speculators
Profit
Institutional investors
Contraction mapping
Asset value
Information content
Pricing strategy
Private information
Trading strategies
Speculation
Persistence

Keywords

  • Forecasting-the-forecasts
  • Frequency domain
  • Market microstructure finance
  • Speculation
  • Stationary linear equilibrium

Cite this

Speculative dynamics. / Bernhardt, Dan; Seiler, P.; Taub, B.

In: Economic Theory, Vol. 44, No. 1, 01.07.2010, p. 1-52.

Research output: Contribution to journalArticle

Bernhardt, D, Seiler, P & Taub, B 2010, 'Speculative dynamics', Economic Theory, vol. 44, no. 1, pp. 1-52. https://doi.org/10.1007/s00199-009-0456-y
Bernhardt, Dan ; Seiler, P. ; Taub, B. / Speculative dynamics. In: Economic Theory. 2010 ; Vol. 44, No. 1. pp. 1-52.
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