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Positive Feedback Investment Strategies and Destabilizing Rational Speculation


J. Bradford DeLong


University of California, Berkeley; Federal Reserve Bank of San Francisco; National Bureau of Economic Research (NBER)

Andrei Shleifer


Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Lawrence H. Summers


Harvard University; National Bureau of Economic Research (NBER)

Robert Waldmann


Universita di Roma Tor Vergata; National Bureau of Economic Research (NBER)
March 1989

NBER Working Paper No. w2880

Abstract:     
Analyses of the role of rational speculators in financial markets usually presume that such investors dampen price fluctuations by trading against liquidity or noise traders. This conclusion does not necessarily hold when noise traders follow positive-feedback investment strategies buy when prices rise and sell when prices fall. In such cases, it may pay rational speculators to try to jump on the bandwagon early and to purchase ahead of noise trader demand. If rational speculators' attempts to jump on the bandwagon early trigger positive-feedback investment strategies, then an increase in the number of forward-looking rational speculators can lead to increased volatility of prices about fundamentals.

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Date posted: June 25, 2004  

Suggested Citation

DeLong, J. Bradford, Shleifer, Andrei, Summers, Lawrence H. and Waldmann, Robert, Positive Feedback Investment Strategies and Destabilizing Rational Speculation (March 1989). NBER Working Paper No. w2880. Available at SSRN: http://ssrn.com/abstract=430589

Contact Information

James Bradford DeLong (Contact Author)
University of California, Berkeley ( email )
Department of Economics
#3880
Berkeley, CA 94720-3880
United States
(510) 643-4027 (Phone)
(510) 642-6615 (Fax)
Federal Reserve Bank of San Francisco
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San Francisco, CA 94105
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National Bureau of Economic Research (NBER)
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Andrei Shleifer
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)
HOME PAGE: http://www.economics.harvard.edu/~ashleife/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
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B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Lawrence H. Summers
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert Waldmann
Universita di Roma Tor Vergata ( email )
Piazzale Aldo Moro 5
Roma, Rome 00185
Italy
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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