Re: Currency Arbitrage, Hedging, Speculating, and Controls

["Bruce R. McFarling" <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Fri, 24 Oct 1997 10:02:00 -0700, Colin Danby <danbyc@xxxxxxx>
wrote:
>...
>If you start with the assumption that traders can
>be sorted into rational and noise traders then it's
>not surprising that you get this sort of result
>out of your model.

	Just thought I'd point out that in a non-ergodic
economic system, those who trade on the basis of
the fundamentals that we know about will be leaving
undiscovered opportunities for speculative profits
go by, because the models regarding what the fundamental
are will be necessarily incomplete.  So 'stochastic'
traders may be seen as *exploratory* traders, equivalent
to fisherment who are employing a 'search for new fishing
grounds' strategy rather than a 'rational exploitation of
known fishing grounds' strategy.
	Now, even if the information generated by the results
of this exploratory trading is useful information (and I'd
be prepared to listen to arguments on either side of that
question), it may well be that the need to 'guess right
first' to profit from exploratory trading generates a
volume of stochastic trading far in excess of the volume
requiremed to generate information about the evolution of
the system.
	This is why I like a tax on gross capital gains on
financial assets held for short period.  For those who are
buying to hedge, short term gains are a windfall, while for
those whose activities are generating an increased need to
hedge, the short term gains are the whole point.  Perhaps a
capital gains surcharge on assets held for less than a
fortnight would increase the emphasis on 'guessing right' for
longer term moves and reduce the emphasis on 'guessing right'
for extremely short term fluctuations.

Virtually,

Bruce McFarling, Newcastle, NSW
ecbm@xxxxxxxxxxxxxxxxxxx