Financial crises in efficient markets: How fundamentalists fuel volatility

Ariane Szafarz

Journal of Banking & Finance, 2012, vol. 36, issue 1, 105-111

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

Keywords: Efficient markets; Speculators; Fundamentalists; Speculative bubbles; Liquidity (search for similar items in EconPapers)
JEL-codes: D84 G01 G12 G14 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Financial crises in efficient markets: How fundamentalists fuel volatility (2012)
Working Paper: Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:1:p:105-111

DOI: 10.1016/j.jbankfin.2011.06.008

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