Speculative dynamics

Dan Bernhardt, P. Seiler, B. Taub

Research output: Contribution to journalArticlepeer-review

10 Scopus citations


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
Issue number1
StatePublished - Jul 2010

Bibliographical note

Funding Information:
An earlier draft was titled, “Cladistic Asset Pricing”. We thank Roger Germundsson, Ken Kasa, Lars Hansen, Burton Hollifield, Conrad Wolfram, and especially conference discussants, Kerry Back and Pete Kyle, for helpful comments and suggestions. We also thank seminar participants at the University of Chicago, the University of Illinois, the University of Rochester, University College London, the Western Finance Association meetings, the Utah Winter Finance meetings, the Society for Economic Dynamics and the Bachelier Society. We gratefully acknowledge financial support from NSF grant # SES-0317700.


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


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