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Speculative Bubbles and Overreaction to Technological Innovation

"Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street," observed legendary speculator Jesse Livermore. History tells us that periods of major technological innovation are typically accompanied by speculative bubbles as economic agents overreact to genuine advancements in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. But on the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem.

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File URL: http://www.capco.com/files/pdf/1595/01_Part%201/08_Speculative%20bubbles%20and%20overreaction%20to%20technological%20innovation.pdf
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Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 26 (2009)
Issue (Month): ()
Pages: 51-54

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Handle: RePEc:ris:jofitr:0826
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  1. Eugene N. White, 2004. "Bubbles and Busts: The 1990s in the Mirror of the 1920s," FRU Working Papers 2004/09, University of Copenhagen. Department of Economics. Finance Research Unit.
  2. Martin S. Feldstein, 2007. "Housing, Credit Markets and the Business Cycle," NBER Working Papers 13471, National Bureau of Economic Research, Inc.
  3. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
  4. Kevin J. Lansing, 2007. "Asset price bubbles," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct26.
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