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Speculative Dynamics and the Role of Feedback Traders

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  • Cutler, David M
  • Poterba, James M
  • Summers, Lawrence H

Abstract

This paper summarizes our earlier research documenting the characteristic speculative dynamics of many asset markets and suggests a framework for understanding them. Our model incorporates "feedback traders," traders whose demand is based on the history of past returns rather than the expectation of future fundamentals. We use this framework to describe ways in which the characteristic return patterns might be generated, and also to address the long-standing question of whether profitable speculation stabilizes asset markets.
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Suggested Citation

  • Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
  • Handle: RePEc:aea:aecrev:v:80:y:1990:i:2:p:63-68
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    1. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 253-273.
    2. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 515-528.
    3. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 529-546.
    4. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    5. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
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