Trading frenzies and their impact on real investment

Goldstein, Itay, Ozdenoren, Emre and Yuan, Kathy ORCID: 0000-0001-9895-7545 (2013) Trading frenzies and their impact on real investment. Journal of Financial Economics, 109 (2). pp. 566-582. ISSN 0304-405X (Submitted)

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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.

Item Type:	Article
Official URL:	http://www.sciencedirect.com/science/journal/03044...
Additional Information:	© 2013 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General
Date Deposited:	16 May 2013 12:25
Last Modified:	13 Nov 2024 05:45
URI:	http://eprints.lse.ac.uk/id/eprint/50276

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