The author studies an intertemporal asset market where insiders coexist with 'nonfundamental' speculators. Nonfundamental speculators possess no private information on fundamental values of assets but have superior knowledge about some aspect of the market environment. The author shows that the entry of these (rational) speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market. Also, equilibrium trades display patterns of empirical interest. For example, speculators appear to chase trends and lose money after market 'overreactions,' while insiders trade as contrarians and profit after such overreactions. Copyright 1996 by American Finance Association.
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Volume (Year): 51 (1996)
Issue (Month): 2 (June)
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