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Non-Fundamental Speculation Revisited

15 Pages Posted: 24 Feb 2017  

Liyan Yang

University of Toronto - Rotman School of Management

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: February 20, 2017

Abstract

We show that a linear pure strategy equilibrium may not exist in Madrigal's (1996, Journal of Finance) setup, contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second-order condition. If the non-fundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.

Suggested Citation

Yang, Liyan and Zhu, Haoxiang, Non-Fundamental Speculation Revisited (February 20, 2017). Journal of Finance, Forthcoming; Rotman School of Management Working Paper No. 2922855. Available at SSRN: https://ssrn.com/abstract=2922855

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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