Positive Feedback Investment Strategies and Destabilizing Rational Speculation

Positive Feedback Investment Strategies and Destabilizing Rational Speculation ABSTRACT Analyses of rational speculation usually presume that it dampens fluctuations caused by “noise” traders. This is not necessarily the case if noise traders follow positive‐feedback strategies—buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive‐feedback trading, then an increase in the number of forward‐looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Positive Feedback Investment Strategies and Destabilizing Rational Speculation

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Publisher
Wiley
Copyright
1990 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1990.tb03695.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT Analyses of rational speculation usually presume that it dampens fluctuations caused by “noise” traders. This is not necessarily the case if noise traders follow positive‐feedback strategies—buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive‐feedback trading, then an increase in the number of forward‐looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1990

References

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