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Positive Feedback Investment Strategies and Destabilizing Rational Speculation

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  • J. Bradford De Long
  • Andrei Shleifer
  • Lawrence H. Summers
  • Robert J. Waldmann

Abstract

Analyses of the role of rational speculators in financial markets usually presume that such investors dampen price fluctuations by trading against liquidity or noise traders. This conclusion does not necessarily hold when noise traders follow positive-feedback investment strategies buy when prices rise and sell when prices fall. In such cases, it may pay rational speculators to try to jump on the bandwagon early and to purchase ahead of noise trader demand. If rational speculators' attempts to jump on the bandwagon early trigger positive-feedback investment strategies, then an increase in the number of forward-looking rational speculators can lead to increased volatility of prices about fundamentals.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2880.

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Date of creation: Mar 1989
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Publication status: published as Journal of Finance, Vol. 45, No. 2, (June 1990), pp. 374-97.
Handle: RePEc:nbr:nberwo:2880

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  1. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
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