Learning Complementarities Through Hedging-Motivated Trades

23 Pages Posted: 16 Mar 2010 Last revised: 13 Apr 2011

See all articles by Yan Li

Yan Li

Temple University - Fox School of Business and Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: March 15, 2010

Abstract

Using a standard Grossman and Stiglitz (1980, AER) framework, this paper explicitly models noise trading as a result of hedging-motivated trades due to hedgers' privileged investment opportunities. The hedging-motivated trading by hedgers and the speculative trading by informed speculators affect price informativeness in opposite ways, leading to the possibility of strategic complementarities in information acquisition, as opposed to the strategic substitutes in Grossman and Stiglitz (1980). This strategic complementarity may produce multiple equilibria in the information market, and switches between sharply differentiated equilibria could potentially explain large movements in asset prices and trading volumes.

Keywords: CARA-Normal, hedging, learning, strategic complementarities, multiple equilibria

JEL Classification: D82, D83, G14

Suggested Citation

Li, Yan and Yang, Liyan, Learning Complementarities Through Hedging-Motivated Trades (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1572075 or http://dx.doi.org/10.2139/ssrn.1572075

Yan Li

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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