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Financial Instability: Re-tradable Assets and Speculation

In: Economics of Markets

Author

Listed:
  • Sabiou M. Inoua

    (Chapman University)

  • Vernon L. Smith

    (Chapman University)

Abstract

The theory of competitive market price formation developed so far does not apply if the goods traded can be re-traded for capital gains, for then the stabilizing virtue of competition can be counteracted by speculation. The concept of re-tradability of a good is crucial for understanding market instability at both the macro and micro level, as directly evidenced by laboratory experiments. We offer a relatively simple model of speculative asset price dynamics that explains the excess, fat-tailed, and clustered volatility, three stylized facts of speculative asset prices.

Suggested Citation

  • Sabiou M. Inoua & Vernon L. Smith, 2022. "Financial Instability: Re-tradable Assets and Speculation," Springer Books, in: Economics of Markets, chapter 0, pages 157-182, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-08428-7_7
    DOI: 10.1007/978-3-031-08428-7_7
    as

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