On Speculation, Index Futures Markets, and the Link Between Market Volatility and Investor Welfare Academic Article uri icon

abstract

  • This paper develops a trading model that incorporates informed speculators as well as investors who possess incorrect expectations about asset values. It is shown that the introduction of an index futures market, by stimulating additional misinformed speculation, increases market liquidity and adversely affects price variability and efficiency in the underlying stock markets. An analysis of the welfare of uninformed hedgers suggests that the relationship between uninformed investor welfare and two key parameters that dominate policy discussions, market liquidity and price variability, is quite tenuous. Copyright 1996 by MIT Press.

publication date

  • May 1996