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Trading frenzies and their impact on real investment

Journal

Journal of Financial Economics

Subject

Economics

Authors / Editors

Goldstein I;Ozdenoren E;Yuan K

Biographies

Publication Year

2013

Abstract

We study a model in which a capital provider learns from the price of a firm's security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, in which speculators all wish to trade like others, generating large pressure on prices. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators' incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the effect of various market parameters on the likelihood of trading frenzies to arise

Keywords

Trading frenzies; Feedback effect; Financial-market runs; Bear raids

Available on ECCH

No


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