Spiegler, R.; Eliaz, K.; (2007) Optimal speculative trade among large traders. (ELSE Working Papers 247). ESRC Centre for Economic Learning and Social Evolution: London, UK.

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Abstract

A collection of large traders hold heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming an exogenous set of financial instruments, we aim to characterize the financial instrument that maximizes the traders' gains from speculative trade, subject to the incentive constraints that result from the traders' ability to manipulate market prices. We show that this instrument 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.

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