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The Price Impact and Survival of Irrational Traders


Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long-run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long-run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long-run limit. Copyright 2006 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 1 (02)
Pages: 195-229

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Handle: RePEc:bla:jfinan:v:61:y:2006:i:1:p:195-229
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