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Asset Price Dynamics and Infrequent Feedback Trades
Author(s) -
BALDUZZI PIERLUIGI,
BERTOLA GIUSEPPE,
FORESI SILVERIO
Publication year - 1995
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1995.tb05196.x
Subject(s) - dividend , speculation , stock (firearms) , volatility (finance) , stock price , economics , monetary economics , asset (computer security) , financial economics , positive feedback , negative feedback , econometrics , business , finance , computer science , mechanical engineering , paleontology , computer security , series (stratigraphy) , engineering , biology , physics , electrical engineering , quantum mechanics , voltage
This article combines the continuous arrival of information with the infrequency of trades, and investigates the effects on asset price dynamics of positive and negative‐feedback trading. Specifically, we model an economy where stocks and bonds are traded by two types of agents: speculators who maximize expected utility, and feedback traders who mechanically respond to price changes and infrequently submit market orders. We show that positive‐feedback strategies increase the volatility of stock returns, and the response of stock prices to dividend news. Conversely, the presence of negative‐feedback traders makes stock returns less volatile, and prices less responsive to dividends.