Trading frenzies and their impact on real investment

Itay Goldstein, Emre Ozdenoren and Kathy Yuan

Journal of Financial Economics, 2013, vol. 109, issue 2, 566-582

Abstract: We study a model in which a capital provider learns from the price of a firm's security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, in which speculators all wish to trade like others, generating large pressure on prices. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators' incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the effect of various market parameters on the likelihood of trading frenzies to arise.

Keywords: Trading frenzies; Feedback effect; Financial-market runs; Bear raids (search for similar items in EconPapers)
JEL-codes: D82 D84 G01 G14 G31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (89)

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Related works:
Working Paper: Trading frenzies and their impact on real investment (2011)
Working Paper: Trading Frenzies and their Impact on Real Investment (2011)
Working Paper: Trading Frenzies and Their Impact on Real Investment (2010)
Working Paper: Trading Frenzies and Their Impact on Real Investment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:2:p:566-582

DOI: 10.1016/j.jfineco.2013.03.011

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