Speculative demand
Encyclopedia
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
.
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 payment and the capital gain(or loss).A rise in interest rate will cause bond prices to fall, and that implies a capital loss form holding bonds. Accordingly, the return on bonds can be negative. thus, people hold money to avoid the loss from bonds
On the other hand, assets demand for money is the money held by people to avoid the risk of capital loss due to holding other financial assets, e.g., bonds, equities, long-term bonds, etc., 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, more people will expect a rise in interest rate(or a fall in 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.
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
for financial assets, such as securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
or foreign currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
that is not dictated by real transactions such as trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
, or financing
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
.
The need for cash to take advantage of investment opportunities that may arise.
In economic theory
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, specifically Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, speculative demand is one of the determinants of demand for money (and credit), the others being transactions demand
Transactions demand
Transactions demand, in economic theory, specifically Keynesian economics, is one of the determinants of demand for money , the others being speculative demand and precautionary demand. Transactions demand is illustrated as a vertical line on the money demand graph.The demand of money is arisen...
and precautionary demand
Precautionary demand
Precautionary demand is the demand for financial assets, such as securities, money or foreign currency; it is money people want in case of emergency....
.
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 payment and the capital gain(or loss).A rise in interest rate will cause bond prices to fall, and that implies a capital loss form holding bonds. Accordingly, the return on bonds can be negative. thus, people hold money to avoid the loss from bonds
On the other hand, assets demand for money is the money held by people to avoid the risk of capital loss due to holding other financial assets, e.g., bonds, equities, long-term bonds, etc., 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, more people will expect a rise in interest rate(or a fall in 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.