Speculative Dynamics of Prices and Volume

We present a dynamic theory of prices and volume in asset bubbles. In our framework, predictable price increases endogenously attract short-term investors more strongly than long-term investors. Short-term investors amplify volume by selling more frequently, and they destabilize prices through positive feedback. Our model predicts a lead–lag relationship between volume and prices, which we confirm in the 2000–2011 US housing bubble. Using data on 50 million home sales from this episode, we document that much of the variation in volume arose from the rise and fall in short-term investment.