Speculation and Hedging in Segmented Markets

Review of Financial Studies, 2014, 27(3): 881-922

50 Pages Posted: 21 Nov 2010 Last revised: 26 Feb 2016

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Yan Li

Temple University - Fox School of Business and Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: May 17, 2013

Abstract

We analyze a model where traders have different trading opportunities and learn information from prices. The difference in trading opportunities implies that different traders may have different trading motives when trading in the same market -- some trade for speculation and others for hedging -- and thus they may respond to the same information in opposite directions. This implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps. Our model is relevant to various realistic settings and helps to understand a variety of modern financial markets.

Keywords: Speculation, Hedging, Market Segmentation, Price Informativeness, Information Acquisition, Asset Prices

JEL Classification: G14, G12, G11, D82

Suggested Citation

Goldstein, Itay and Li, Yan and Yang, Liyan, Speculation and Hedging in Segmented Markets (May 17, 2013). Review of Financial Studies, 2014, 27(3): 881-922. Available at SSRN: https://ssrn.com/abstract=1712472 or http://dx.doi.org/10.2139/ssrn.1712472

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

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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