Trading frenzies and their impact on real investment
Journal
Journal of Financial Economics
Subject
Economics
Publishing details
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
