Speculative demand

From Wikipedia, the free encyclopedia
Jump to: navigation, search

Speculative demand is the demand for financial assets, such as securities, money, or foreign currency, that is not dictated by real transactions such as trade or financing.

Speculative demand arises from the need for cash to take advantage of investment opportunities that may arise.

In economic theory, specifically Keynesian economics, speculative demand is one of the determinants of demand for money (and credit), the others being transactions demand and precautionary demand.

Speculative demand refers to real balances held for the purpose of avoiding capital loss from holding bonds. The net return on bonds is the sum of the interest payments and the capital gains (or losses) from their varying market value. A rise in interest rate causes aftermarket bond prices to fall, and that implies a capital loss from holding bonds. Accordingly, the return on bonds can be negative. Thus, people may hold money to avoid the loss from bonds.

Assets demand for money is the money held by people to avoid the risk of capital loss due to holding any types of financial assets—e.g. bonds, equities—because these assets have variable market values. Money is treated as a form of asset for storing wealth.

The assets demand for money is inversely related to the market interest rate. This is because at lower interest rate, more people will expect a rise in interest rate (and thus a fall in aftermarket bond prices). As a result, more people will hold their wealth in money rather than bonds, i.e. the speculative balances will be greater at a lower interest rate. It also depends on investors' aversion to risk, the relative demand for and the supply of other financial assets and real assets, and the change in expectations of the economic climate.

External links[edit]