Speculation Under Unawareness

32 Pages Posted: 15 Feb 2018 Last revised: 18 Apr 2018

Date Written: March 15, 2018

Abstract

“No trade” theorems establish that, in various trading environments, investors who share a common prior will not engage in speculation, as long as expected utility, Bayesian updating and full awareness are imposed. We relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behavior emerges. We find that if common knowledge is assumed (as in the settings of Aumann [1976] and Milgrom and Stokey [1982]), unawareness cannot generate speculation. This is not true, however, in settings where no common knowledge is assumed, such as speculation in equilibrium (Geanakoplos [1989]) and betting that is always beneficial (Morris [1994]), unless stronger conditions on awareness are imposed.

Keywords: unawareness, trade, speculation, knowledge, common knowledge, bounded perception, awareness

JEL Classification: C70, C72, D80, D82

Suggested Citation

Galanis, Spyros, Speculation Under Unawareness (March 15, 2018). Games and Economic Behavior, Vol. 109, 2018, Available at SSRN: https://ssrn.com/abstract=3117972 or http://dx.doi.org/10.2139/ssrn.3117972

Spyros Galanis (Contact Author)

Durham University ( email )

Durham, DH1 3LE
Great Britain

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