Trading Frenzies and Their Impact on Real Investment

Itay Goldstein, Kathy Yuan and Emre Ozdenoren

No 7652, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a model where 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, where speculators all wish to trade like others, generating large shifts in prices and firms? investments. 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 determinants of coordination among speculators and study policy measures that affect patterns of coordination to improve price informativeness and investment efficiency.

Keywords: Coordination; Financial markets; Heterogenous information; Learning; Liquidity (search for similar items in EconPapers)
JEL-codes: D82 G01 G14 (search for similar items in EconPapers)
Date: 2010-01
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Trading frenzies and their impact on real investment (2013)
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)
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