Speculative securities (Q1817971)

The paper deals with the problem of security design in an asset market with asymmetrically informed traders when some agents have private information and can trade to exploit their superior information. Under certain conditions it is shown that a sunspot-dependent speculative security can lead to a better allocation of risk than a nonspeculative security. The sunspot introduces noise in the price system which may be desirable. Innovation of futures contracts is considered as a particular institutional mechanism for the design of securities. Introducing a speculative component into the asset payoff may increase or decrease trading activity depending on how this activity is measured. But the effect on the commission revenue of a futures exchange is unambiguous -- revenue is always lower with a speculative security. Hence the incentives of a futures exchange may be in conflict with the interests of hedgers.