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Nonfundamental Speculation Revisited

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  • LIYAN YANG
  • HAOXIANG ZHU

Abstract

We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second†order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.

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  • Liyan Yang & Haoxiang Zhu, 2017. "Nonfundamental Speculation Revisited," Journal of Finance, American Finance Association, vol. 72(6), pages 2759-2772, December.
    • Handle: RePEc:bla:jfinan:v:72:y:2017:i:6:p:2759-2772
    DOI: 10.1111/jofi.12548
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