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)
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)
Universita di Roma Tor Vergata; National Bureau of Economic Research (NBER)
NBER Working Paper No. w2880
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.
Number of Pages in PDF File: 31working papers series
Date posted: June 25, 2004
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