"Weight of Money" Pricing and Speculative Dynamics
We explore price dynamics in a `cash in the market' asset pricing model, where the price of an asset is the ratio of the amount of cash chasing the asset to the available supply of the asset. Traders base their current trading strategies on their beliefs about future cash inflows/outflows in the market for the asset. These future liquidity flows are in turn the outcome of their future trading strategies. This may generate speculation in the form of self-fulfilling liquidity dry-ups or overflows. In the unique speculative equilibrium, rates of returns exhibit time-series properties such as long series of identically signed returns followed by large reversals, even if the fundamental of the asset follows a random walk.
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