Real Effects of Futures Speculation: Asymptotically Rational Expectations

To what extent does the diversity in the forecasting ability of futures speculators simply result in transfers of wealth among themselves, and to what extent does it affect the allocation of resources? On the basis of Bayesian analysis, it is assumed that the variance of forecast errors between the subjective and objective expectations of the subsequent price differs among groups. Two major conclusions are as follows. (1) If (given our parameter estimates) the forecast error variance of the amateur speculators is less than six times that of the professionals, then the existence of futures markets will lower the expected price to consumers, increase expected output, and lower the variance of the price. (2) Since small speculators lose to the professionals, the relative variance of the forecast error of the amateurs to the professionals exceeds their relative weights, as measured by the ratio of numbers to average risk aversion.