On the Possibility of Informative Equilibria in Futures Markets with Feedback

We consider the market for an Arrow-Debreu contingent claim in the presence of an intervening agent who is able to alter the probability of the event the market trades on in response to the price. We find that: (i) a rational... [ view full abstract ]

We consider the market for an Arrow-Debreu contingent claim in the presence of an intervening agent who is able to alter the probability of the event the market trades on in response to the price. We find that: (i) a rational expectations equilibrium may not exist; (ii) the marketprice may decline in response to information that is ex-ante more favorable to the occurrence of the underlying event; (iii) an equilibrium that reveals no information may obtain. Thus, feedback from an intervening agent materially alters the way price responds to information, and potentially undermines the viability of the market itself.