Do Speculative Stocks Lower Prices and Increase Volatility of Value Stocks?

The Journal of Psychology & Financial Markets, Vol. 3, 2002

36 Pages Posted: 7 Jun 2002

See all articles by Gunduz Caginalp

Gunduz Caginalp

University of Pittsburgh - Department of Mathematics

Vladimira A. Ilieva

The Institute of Behavioral Finance

David Porter

Chapman University - Department of Business and Economics

Vernon L. Smith

Chapman University - Economic Science Institute; Chapman University School of Law

Abstract

The influence of speculative stocks on value stocks is examined through a set of economics experiments. The speculative asset is designed to model a company involved in a rapidly growing market that will be saturated at some unknown point. Using a control experiment where both assets are similar value stocks, we find statistical support for the assertion that the presence of a speculative stock increases the volatility and diminishes the price of the value stock. In addition, the temporal minimum price of the value stock during the last phase of the experiment is lower in the presence of the speculative stock (when the trading price of the speculative asset is declining sharply). These results indicate that an overreaction in the speculative stock tends to divert investment capital away from other assets. An examination of the relative magnitude of monthly closing price changes confirm strong correlations between the Dow Jones Average and the more speculative Nasdaq index during the time period in 1990 to 2001 and particularly during the two years prior to the peak in March 2000 (0.72 correlation) and the March 2000 to August 2001 decline (0.79 correlation). Supplementary experiments using independent (or legally separate) markets trading the same asset show that a higher price in one market does not lead to a higher one in the other.

Keywords: asset price dynamics, speculative assets, value stocks, overreaction, excess cash, volatility, legally separated markets, independent markets, Chinese A/B shares

JEL Classification: E44, E47, G12, G14, D50, F43

Suggested Citation

Caginalp, Gunduz and Ilieva, Vladimira A. and Porter, David and Smith, Vernon L., Do Speculative Stocks Lower Prices and Increase Volatility of Value Stocks?. The Journal of Psychology & Financial Markets, Vol. 3, 2002. Available at SSRN: https://ssrn.com/abstract=312421 or http://dx.doi.org/10.2139/ssrn.312421

Gunduz Caginalp (Contact Author)

University of Pittsburgh - Department of Mathematics ( email )

507 Thackeray Hall
Pittsburgh, PA 15260
United States
412-624-8339 (Phone)
412-624-8397 (Fax)

Vladimira A. Ilieva

The Institute of Behavioral Finance ( email )

Jersey City, NJ 07311
United States

David Porter

Chapman University - Department of Business and Economics ( email )

Orange, CA
United States
(714) 997-6915 (Phone)
(714) 628-2881 (Fax)

Vernon L. Smith

Chapman University - Economic Science Institute ( email )

One University Dr.
Orange, CA 92866
United States
714-628-2830 (Phone)

Chapman University School of Law ( email )

One University Drive
Orange, CA 92866-1099
United States

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