The Price Impact and Survival of Irrational Traders

Posted: 12 Sep 2005

See all articles by Leonid Kogan

Leonid Kogan

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

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Yale University - International Center for Finance

Jiang Wang

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

Mark M. Westerfield

University of Washington

Multiple version iconThere are 3 versions of this paper

Abstract

Milton Friedman argued that irrational traders will consistently lose money, won't survive and, therefore, cannot influence long run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long-run limit. In contrast to a partial equilibrium analysis, these general equilibrium considerations matter for the irrational traders' long-run survival.

Keywords: Irrational Traders, Price Impact, Price Influence, Survival, Irrationality, Long Run Prices

JEL Classification: G0, G1, D4

Suggested Citation

Kogan, Leonid and Ross, Stephen A. and Wang, Jiang and Westerfield, Mark M., The Price Impact and Survival of Irrational Traders. Journal of Finance, February 2006. Available at SSRN: https://ssrn.com/abstract=619981

Leonid Kogan (Contact Author)

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

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HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

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Stephen A. Ross

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

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Yale University - International Center for Finance

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Jiang Wang

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

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617-253-2632 (Phone)
617-258-6855 (Fax)

China Academy of Financial Research (CAFR)

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China

National Bureau of Economic Research (NBER)

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United States

Mark M. Westerfield

University of Washington ( email )

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Seattle, WA 98195
United States

HOME PAGE: http://www.markwesterfield.com

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