Document Type

Article

Publication Date

2011

Keywords

Speculation, Derivatives, Arbitrage, Credit default swaps

Disciplines

Banking and Finance Law | Securities Law

Abstract

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.

Comments

This article predates the author's affiliation with Cornell Law School.

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