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Non‐Fundamental Speculation
Author(s) -
MADRIGAL VICENTE
Publication year - 1996
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.1540-6261.1996.tb02694.x
Subject(s) - speculation , market liquidity , economics , monetary economics , asset (computer security) , profit (economics) , financial economics , business , microeconomics , finance , computer security , computer science
We study an intertemporal asset market where insiders coexist with “non‐fundamental” speculators. Non‐fundamental speculators possess no private information on fundamental values of assets, but have superior knowledge about some aspect of the market environment. We show that the entry of these (rational) speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market. Also, equilibrium trades display patterns of empirical interest. For example, speculators appear to chase trends and lose money after market “overreactions,” while insiders trade as contrarians and profit after such overreactions.