Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility

Ariane Szafarz

No 10-052, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: 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. Actually, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit speculation might, surprisingly, end up increasing volatility.

Keywords: Efficient Markets; Speculators; Fundamentalists; Crises; Asset Pricing; Rational Expectations; Speculative Bubbles; Liquidity (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2010-11
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/67769/6/wp10052.pdf Œuvre complète ou partie de l'œuvre (application/pdf)

Related works:
Journal Article: Financial crises in efficient markets: How fundamentalists fuel volatility (2012)
Working Paper: Financial crises in efficient markets: How fundamentalists fuel volatility (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sol:wpaper:2013/67769

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... ulb.ac.be:2013/67769

Access Statistics for this paper

More papers in Working Papers CEB from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().