An arbitrageur who receives good news will buy only if it is likely that, at the end of his trading horizon, a subsequent arbitrageurs' buying will have pushed up the expected price. We show that limited trading horizons result in inefficient prices because informed traders do not act on their information until the event date is sufficiently close. 07-93 Oil futures markets frequently exhibit backwardation whereby more distant oil futures prices are below the current spot price. This is inconsistent with Hotelling's theory that the net price of an exhaustible resource rises over time at the interest rate. We characterize an oil well as a call option and show that backwardation is necessary to induce production.
Production is shown to be non-increasing in the riskiness of future prices.
The empirical analysis indicates that U.S. oil production is directly related to the backwardation and inversely related to implied volatility. We relate wealth redistribution, asset pricing, and trade in financial assets by introducing heterogeneous agents into a Lucas tree-model. Heterogeneity of agents causes trade in financial assets and dynamic wealth redistribution. Interest rates, risk premia, return volatility, and trade volume exhibit time-variance. Using historic interest rate data to calibrate the matrix of nominal state price, and 2.