Speculative securities

A speculative security is an asset whose payoff depends in part on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may f ind it desirable to trade such a security in spite of the fact that it is a poorer hedge against their endowment risks at the time of trade, and has a n associated adverse selection cost. In the specific institutional setting of innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security even when all trader s favor it.