Speculative Holdings under Linear Expectation Processes---A Mean-Variance Approach

Abstract

In this paper, we considered a discrete time abstract market model where the associated commodity is storable. Also, instead of assuming expected profit maximizing speculators, we assumed they employed mean-variance approaches. Within this framework, given a non-degenerate quadratic inventory cost function and a linear expectation process, the optimal speculative carryover may be decomposed into four components of which two are special features arising from mean-variance considerations. Furthermore, assuming a linear non-speculative excess demand function, Friedman's conjecture (i.e., profitable speculation necessarily stabilizes prices) holds from an ex ante point of view.

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