The economic advantage of learners in a spot/futures market

Abstract

This article examines the economic advantage of learners in a futures market. We develop a dynamic model of learning in which a spot market and futures market both exist for a real good. The economy is composed of producers who can engage in hedging activities, speculators who trade in the futures market, and consumers who are described by an inverse demand function for the underlying commodity. Producers and speculators are heterogeneous and are differentiated based upon the predictive equations they employ when formulating forecasts of next period's spot price. We derive the dynamic rational-expectations equilibrium of the model and show that learners enjoy an economic advantage in the futures market. © 2003 Wiley Periodicals, Inc.