Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility
AbstractWhen 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. Actually, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit speculation might, surprisingly, end up increasing volatility.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 10-052.
Length: 25 p.
Date of creation: Nov 2010
Date of revision:
Publication status: Published by:
Contact details of provider:
Postal: CP114/03, 42 avenue F.D. Roosevelt, 1050 Bruxelles
Phone: +32 (0)2 650.48.64
Fax: +32 (0)2 650.41.88
Web page: http://difusion.ulb.ac.be
More information through EDIRC
Efficient Markets; Speculators; Fundamentalists; Crises; Asset Pricing; Rational Expectations; Speculative Bubbles; Liquidity;
Other versions of this item:
- Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 105-111.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-04 (All new papers)
- NEP-FMK-2010-12-04 (Financial Markets)
- NEP-MST-2010-12-04 (Market Microstructure)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Oscar Bernal Diaz & Astrid Herinckx & Ariane Szafarz, 2013.
"Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe,"
Working Papers CEB
13-001, ULB -- Universite Libre de Bruxelles.
- 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.
- Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.