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Non-fundamental Speculation

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  • Madrigal, Vicente

Abstract

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.

Suggested Citation

  • Madrigal, Vicente, 1996. " Non-fundamental Speculation," Journal of Finance, American Finance Association, vol. 51(2), pages 553-578, June.
  • Handle: RePEc:bla:jfinan:v:51:y:1996:i:2:p:553-78
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    Cited by:

    1. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2015. "Order imbalance and selling aggression under a shorting ban: Evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 368-379.
    2. Jia, Xue, 2016. "On the role of information disclosures in capital markets," Other publications TiSEM 9bacfbaa-2162-49fe-92e6-5, Tilburg University, School of Economics and Management.
    3. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1998. "Is There Private Information in the FX Market? The Tokyo Experiment," Journal of Finance, American Finance Association, vol. 53(3), pages 1111-1130, June.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, August.
    5. Golec, Joseph, 1997. "Herding on Noise: The Case of Johnson Redbook's Weekly Retail Sales Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 367-381, September.
    6. Lescourret, Laurence, 2012. "Non-Fundamental Information and Market-Makers' Behavior during the NASDAQ Preopening Session," ESSEC Working Papers WP1212, ESSEC Research Center, ESSEC Business School.
    7. Lambert, Nicolas & Ostrovsky, Michael & Panov, Mikhail, 2014. "Strategic Trading in Informationally Complex Environments," Research Papers 3021, Stanford University, Graduate School of Business.
    8. Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 105-111.
    9. Sugato Chakravarty & Asani Sarkar, 1997. "Can competition between brokers mitigate agency conflicts with their customers?," Staff Reports 25, Federal Reserve Bank of New York.
    10. Albert J. Menkveld & Asani Sarkar & Michel Van der Wel, 2007. "Macro news, risk-free rates, and the intermediary: customer orders for thirty-year Treasury futures," Staff Reports 307, Federal Reserve Bank of New York.
    11. COLLA, Paolo, 2005. "A market microstructure rationale for the S&P game," CORE Discussion Papers 2005008, Universit├ę catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    12. Fang Cai, 2009. "Trader Exploitation Of Order Flow Information During The Ltcm Crisis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(3), pages 261-284.
    13. Janssen, Dirk-Jan & Weitzel, Utz & F├╝llbrunn, Sascha, 2015. "Speculative Bubbles - An introduction and application of the Speculation Elicitation Task (SET)," MPRA Paper 63028, University Library of Munich, Germany.
    14. Fang Cai, 2003. "Was there front running during the LTCM crisis," International Finance Discussion Papers 758, Board of Governors of the Federal Reserve System (U.S.).

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