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Speculation and Price Stability Under Uncertainty: A Generalization

Lien, Da-Hsiang Donald (1984) Speculation and Price Stability Under Uncertainty: A Generalization. Social Science Working Paper, 536. California Institute of Technology , Pasadena, CA. (Unpublished)

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Since Friedman maintained that profitable speculation necessarily stabilizes prices, the necessary and sufficient conditions for his conjecture to hold have been derived following ex post analyses. However, within these frameworks, no uncertainty is involved. In this paper we assume the nonspeculative excess demand functions are always linear but with random slopes and intercepts (i. i. d. across time). Employing dynamic programming approaches, the optimal complete speculation sequence for a monopolistic speculator (which maximizes his long-run expected profits) can be characterized. Furthermore, Friedman's conjecture holds under this sequence. As for competitive speculation cases, we consider three variants arising from deviations of the monopolistic case. Of these, two models establish the property that Friedman's conjecture holds for optimal speculation sequences. However, since this conjecture might be falsified for the other model, a necessary condition is derived. Also, an example is given which shows that, if uncertainties are involved, a destabilizing optimal speculation sequence exists even with linear nonspeculative excess demand functions.

Item Type:Report or Paper (Working Paper)
Additional Information:I am indebted to James Quirk for helpful comments and editings, also to Richard McKelvey for helpful comments. In preparing Section IV, I benefited from useful discussions with David Grether and Quang Vuong. All errors, of course, remain mine.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:536
Record Number:CaltechAUTHORS:20170919-141552441
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81577
Deposited By: Jacquelyn Bussone
Deposited On:19 Sep 2017 21:44
Last Modified:03 Oct 2019 18:44

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