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Positive Feedback Investment Strategies and Destabilizing Rational Speculation
J. Bradford de Long, Andrei Shleifer, Lawrence H. Summers and Robert J. Waldmann
The Journal of Finance
Vol. 45, No. 2 (Jun., 1990), pp. 379-395
Stable URL: http://www.jstor.org/stable/2328662
Page Count: 17
You can always find the topics here!Topics: Prices, Speculators, Investors, Positive feedback, Stock prices, Market prices, Signals, Economic bubbles, Investment strategies, Speculative demand
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Analyses of rational speculation usually presume that it dampens fluctuations caused by "noise" traders. This is not necessarily the case if noise traders follow positive-feedback strategies--buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive-feedback trading, then an increase in the number of forward-looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations.
The Journal of Finance © 1990 American Finance Association