nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒11‒08
one paper chosen by
Thanos Verousis

  1. Strategic Trading, Welfare and Prices with Futures Contracts By Hugues Dastarac

  1. By: Hugues Dastarac
    Abstract: Derivatives contracts are designed to improve risk sharing in financial markets, but among them, forwards, futures and swaps often appear redundant with their underlying assets: buying the asset and storing it is equivalent to buying it later. I show that imperfect competition in a dynamic market creates an incompleteness, opening gains from trading futures; but surprisingly, in equilibrium, agents trading these contracts have lower welfare than without futures. To mitigate their price impact, buyers (sellers) of an asset postpone profitable trades, exposing themselves to upward (downward) future spot price movements: buyers (sellers) would like to buy (sell) futures. However, when futures are introduced, traders also want to influence the spot price at futures maturity to increase futures payoff: this leads buyers (sellers) to sell (buy) futures. Moreover, despite the absence of market segmentation that would preclude arbitrage, the futures price can be above or below the spot price.
    Keywords: Futures, Imperfect Competition, Inefficiency, Mispricing
    JEL: G10 G13 G15
    Date: 2021

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