Trading Frenzies and Their Impact on Real Investment

38 Pages Posted: 8 Feb 2010

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: January 2010

Abstract

We study a model where a capital provider learns from the price of a firm’s security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, where speculators all wish to trade like others, generating large shifts in prices and firms’ investments. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators’ incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the determinants of coordination among speculators and study policy measures that affect patterns of coordination to improve price informativeness and investment efficiency.

Keywords: Coordination, Financial markets, Heterogenous Information, Learning, Liquidity

JEL Classification: D82, G01, G14

Suggested Citation

Goldstein, Itay and Ozdenoren, Emre and Yuan, Kathy Zhichao, Trading Frenzies and Their Impact on Real Investment (January 2010). CEPR Discussion Paper No. DP7652. Available at SSRN: https://ssrn.com/abstract=1547572

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Emre Ozdenoren

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

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London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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