Optimal speculative trade among large traders

Abstract

A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders'gains from speculative trade, subject to the incentive constraints that result from the traders'ability to manipulate market prices. Within a stylized market model, we show that this mechanism a¤ects price volatility without destroying ex-post e¢ cient allocations. We also characterize the implementability of optimal speculative trade when the traders'prior beliefs are private information.

Mechanism design with level-k types: Theory and an application to bilateral trade

“…de Clippel (2014) studies mechanism design when agents are not rational. Glazer & Rubinstein (1998), Eliaz & Spiegler (2006;2008), Severinov &Deneckere (2006), andWolitzky (2016) study behavioral mechanism design in individual decision problems.…”

Information gathering by overconfident agents

“…It has been used extensively in models of noncommon priors. See Eliaz and Spiegler (2006, 2007, 2008a, 2008b), Gervais and Goldstein (2007), Goel and Thakor (2008), Santos‐Pinto (2008), Grubb (2009), De La Rosa (2011), Gervais et al (2011), Sautmann (2013), or Iossa and Martimort (2015).…”

“…19 19 See, for example, Eliaz and Spiegler (2008a, 2008b) for a contracting model where the agent's beliefs are his private information. …”