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Asset Price Dynamics and Infrequent Feedback Trades

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  • Balduzzi, Pierluigi
  • Bertola, Giuseppe
  • Foresi, Silverio

Abstract

This article combines the continuous arrival of information with the infrequency of trades and investigates the effects on asset price dynamics of positive- and negative-feedback trading. Specifically, the authors model an economy where stocks and bonds are traded by two types of agents: speculators who maximize expected utility and feedback traders who mechanically respond to price changes and infrequently submit market orders. They show that positive-feedback strategies increase the volatility of stock returns and the response of stock prices to dividend news. Conversely, the presence of negative-feedback traders makes stock returns less volatile and prices less responsive to dividends. Copyright 1995 by American Finance Association.

Suggested Citation

  • Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1995. " Asset Price Dynamics and Infrequent Feedback Trades," Journal of Finance, American Finance Association, vol. 50(5), pages 1747-1766, December.
  • Handle: RePEc:bla:jfinan:v:50:y:1995:i:5:p:1747-66
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    Cited by:

    1. Pierdzioch, Christian, 2000. "Noise Traders? Trigger Rates, FX Options, and Smiles," Kiel Working Papers 970, Kiel Institute for the World Economy (IfW).
    2. Eric Ghysels & Junghoon Seon, 2000. "The Asian Financial Crisis: The Role of Derivative Securities Trading and Foreign Investors," CIRANO Working Papers 2000s-11, CIRANO.
    3. repec:eme:mfipps:v:36:y:2010:i:3:p:508-529 is not listed on IDEAS
    4. Goetzmann, William N. & Massa, Massimo, 2002. "Daily Momentum and Contrarian Behavior of Index Fund Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(03), pages 375-389, September.
    5. Ghysels, Eric & Seon, Junghoon, 2005. "The Asian financial crisis: The role of derivative securities trading and foreign investors in Korea," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 607-630, June.
    6. Christian Pierdzioch & Andrea Schertler, 2007. "Sources of Predictability of European Stock Markets for High-technology Firms," The European Journal of Finance, Taylor & Francis Journals, vol. 13(1), pages 1-27.
    7. CharlesKaYui Leung & Nan-Kuang Chen, 2010. "Stock Price Volatility, Negative Autocorrelation And The Consumption-Wealth Ratio: The Case Of Constant Fundamentals," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 224-245, May.
    8. Massimo Massa & William Goetzmann, 2001. "Dispersion of Opinion and Stock Returns: Evidence from Index Fund Investors," Yale School of Management Working Papers ysm227, Yale School of Management, revised 01 May 2003.
    9. Christian Bauer & Bernhard Herz, 2004. "Technical trading and the volatility of exchange rates," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 399-415.

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