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Trading Frenzies and Their Impact on Real Investment

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  • Goldstein, Itay
  • Ozdenoren, Emre
  • Yuan, Kathy

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7652.

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Date of creation: Jan 2010
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Handle: RePEc:cpr:ceprdp:7652

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Keywords: Coordination; Financial markets; Heterogenous Information; Learning; Liquidity;

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References

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Citations

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Cited by:
  1. Jennie Bai & Thomas Philippon & Alexi Savov, 2012. "Have financial markets become more informative?," Staff Reports 578, Federal Reserve Bank of New York.
  2. Philip Bond & Alex Edmans & Itay Goldstein, 2011. "The Real Effects of Financial Markets," NBER Working Papers 17719, National Bureau of Economic Research, Inc.
  3. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2010. "Beauty Contests and Irrational Exuberance: A Neoclassical Approach," Levine's Working Paper Archive 661465000000000237, David K. Levine.
  4. Markus K. Brunnermeier & Martin Oehmke, 2013. "Predatory Short Selling," NBER Working Papers 19514, National Bureau of Economic Research, Inc.
  5. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2011. "Information Aggregation, Investment, and Managerial Incentives," NBER Working Papers 17330, National Bureau of Economic Research, Inc.
  6. Tarek Alexander Hassan & Thomas Mertens, 2014. "Information Aggregation in a DSGE Model," NBER Chapters, in: NBER Macroeconomics Annual 2014, Volume 29 National Bureau of Economic Research, Inc.
  7. Pablo Kurlat & Laura Veldkamp, 2012. "Should We Regulate Financial Information," Working Papers 12-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Avanidhar Subrahmanyam & Sheridan Titman, 2013. "Financial Market Shocks and the Macroeconomy," NBER Working Papers 19383, National Bureau of Economic Research, Inc.

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