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Financial crises in efficient markets: How fundamentalists fuel volatility

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  • Szafarz, Ariane

Abstract

When a financial crisis breaks out, speculators typically get the blame whereas fundamentalists are presented as the safeguard against excessive volatility. This paper proposes an asset pricing model where two types of rational traders coexist: short-term speculators and long-term fundamentalists, both sharing the same information set. In this framework, excess volatility not only exists, but is actually fueled by fundamental trading. Consequently, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit rational speculation might, surprisingly, end up increasing volatility.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 1 ()
Pages: 105-111

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:1:p:105-111

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Efficient markets; Speculators; Fundamentalists; Speculative bubbles; Liquidity;

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Citations

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Cited by:
  1. Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  2. Marie Briere & Ariane Chapelle & Ariane Szafarz, 2012. "No contagion, only globalization and flight to quality," Working Papers CEB 12-010, ULB -- Universite Libre de Bruxelles.
  3. Astrid Herinckx & Ariane Szafarz, 2012. "Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe," Working Papers CEB 12-002, ULB -- Universite Libre de Bruxelles.

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