Legitimate speculation versus excessive speculation

Damir Tokic

Journal of Asset Management, 2014, vol. 15, issue 6, No 4, 378-391

Abstract: Abstract The literature suggests that excessive speculation is hard to define, and thus difficult to regulate. The aim of this article is to provide a framework to differentiate between legitimate speculation and excessive speculation, using the efficient market mechanism as a guide (or blueprint). Specifically, I argue that all speculative strategies that improve market efficiency, based on public information, with no predatory/manipulative elements, can be classified as legitimate speculation, while all speculative strategies that purposely cause market inefficiencies, with predatory/manipulative behavior, can be classified as excessive speculation. Accordingly, I classify rational arbitrage, discretionary trading and systematic trend-following as legitimate speculation, which should be encouraged. Using the same framework, I classify insider trading, rational destabilizing speculation and arbitraging arbitragers as excessive speculation, which must be regulated.

Keywords: legitimate speculation; excessive speculation; market efficiency; trend-following; discretionary trading; bubbles (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/jam.2014.33

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