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- Title
The Existence of Futures Markets, Noisy Rational Expectations and Informational Externalities.
- Authors
Grossman, Sanford J.
- Abstract
It is a fact that futures markets exist in some commodities and not others. Similarly, contingent commodity contracts of the type described by Debreu do not exist for all commodities in ail states of the world. Any explanation of this phenomenon must be intimately connected with a theory of what functions these markets serve. The KeynesHicks theory of commodity futures markets is that they provide a mechanism by which risk averse speculators insure other risk averse traders who hold (positive or negative) stocks of a commodity subject to price fluctuation. We propose a new explanation of the role of futures markets as a place where information is exchanged, and where people who collect and analyse information about future states of the world can earn a return on their investment in information gathering. In particular, it is shown how the private and social incentives for the operation of a futures market depend on how much information spot prices alone can convey from "informed" to "uninformed" traders. (Firms which have information about future states of the world are called "informed", while firms who do not are called "uninformed".) In equilibrium, without a futures market, informed firms will use their information about next period's price to make spot market purchases. The commodity purchase is stored in anticipation of a capital gain. Therefore, the trading activity of informed firms in the present spot market makes the spot price a function of their information. Uninformed traders can use the spot price as a statistic which reveals some of the informed traders' information. When the spot price reveals all of the informed traders' information, both types of traders have the same beliefs about next period's price. In this case there will be no incentive to trade based upon differences in beliefs about next period's price.
- Subjects
COMMODITY futures; RATIONAL expectations (Economic theory); COMMERCIAL products; ECONOMIC forecasting; UNCERTAINTY; FUTURES market; FUTURES; ECONOMICS
- Publication
Review of Economic Studies, 1977, Vol 44, Issue 3, p431
- ISSN
0034-6527
- Publication type
Article
- DOI
10.2307/2296900