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Financial crises in efficient markets: How fundamentalists fuel volatility

  • Ariane Szafarz

When a financial crisis breaks out, speculators typically get the blame whereas fundamentalists are presented as the safeguard against excessive volatility. This paper proposes an asset pricing model where two types of rational traders coexist: short-term speculators and long-term fundamentalists, both sharing the same information set. In this framework, excess volatility not only exists, but is actually fueled by fundamental trading. Consequently, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit rational speculation might, surprisingly, end up increasing volatility. © 2011 Elsevier B.V.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/149191.

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Date of creation: Jan 2012
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Publication status: Published in: Journal of banking & finance (2012) v.36 n° 1,p.105-111
Handle: RePEc:ulb:ulbeco:2013/149191
Note: SCOPUS: ar.j
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