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Trading frenzies and their impact on real investment

Goldstein, Itay and Ozdenoren, Emre and Yuan, Kathy (2010) Trading frenzies and their impact on real investment. CEPR Discussion Paper, DP7652. Centre for Economic Policy Research, London, UK.

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Identification Number: DP7652

Abstract

We study a model where 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, where speculators all wish to trade like others, generating large shifts in prices and firms' investments. 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 determinants of coordination among speculators and study policy measures that affect patterns of coordination to improve price informativeness and investment efficiency.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org/default_static.htm
Additional Information: © 2010 Centre for Economic Policy Research
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 10 Aug 2011 13:14
Last Modified: 12 Aug 2011 10:27
URI: http://eprints.lse.ac.uk/id/eprint/37798

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