Heterogeneous expectations of traders in speculative futures markets

The representative agent hypothesis is disputable on theoretical grounds because it is inconsistent with observed trading behavior and the existence of speculative markets. In such markets, the representative agent hypothesis implies agents hold homogeneous expectations. If this were true, speculative markets would fail as only one side of the market would be represented, either demand or supply. Nonetheless, the homogeneity assumption has been maintained in the past to ensure tractability because of the difficulty of explicit aggregation across heterogeneous expectations. In this article, we present and apply an approach for analyzing heterogeneity in specific market settings. To do so, our approach specifies an underlying distribution of expectations that is consistent with heterogeneity across expectations. To demonstrate the utility of the approach, we present results from its application to a time series of commodity futures prices. Results are consistent with the conclusion that significant heterogeneity in expectations exists in speculative futures markets.