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Supply and Shorting in Speculative Markets

26 September 2017 at 2:01 PM - 3:00 PM

Room 105, Campus on Viale Romania, 32

Speaker: Marcel Nutz, Columbia University

We propose a continuous-time model of trading among risk-neutral
agents with heterogeneous beliefs. Agents face quadratic
costs-of-carry on their positions and as a consequence, their marginal
valuation of the asset decreases when the magnitude of their position
increases, as it would be the case for risk-averse agents. In the
equilibrium models of investors with heterogeneous beliefs that
followed the original work by Harrison and Kreps, investors are
risk-neutral, short-selling is prohibited and agents face a constant
marginal cost of carrying positions. The resulting resale option
guarantees that the equilibrium price exceeds the price of the asset
in a static buy-and-hold model where speculation is ruled out. Our
model features three main novelties. First, increasing marginal costs
entail that the price depends on the exogenous supply. Second, in
addition to the resale option, agents may also value an option to
delay, and this may cause the market to equilibrate below the static
buy-and-hold price. Third, we introduce the possibility of
short-selling; then the resale option for agents with short positions
partly compensates the resale option for long agents. (Joint work with
Jose Scheinkman)