Positive Feedback Investment Strategies and Destabilizing Rational Speculation

31 Pages Posted: 25 Jun 2004 Last revised: 24 Aug 2008

See all articles by J. Bradford DeLong

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); Harvard University - Harvard Kennedy School (HKS)

Robert Waldmann

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

Date Written: March 1989

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.

Suggested Citation

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

James Bradford DeLong (Contact Author)

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