Trading Frenzies and their Impact on Real Investment

Itay Goldstein (itayg@wharton.upenn.edu), Emre Ozdenoren and Kathy Yuan

FMG Discussion Papers from Financial Markets Group

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 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 analyse the effect of various market parameters on the likelihood of trading frenzies to arise.

Date: 2011-02
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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 (2010)
Working Paper: Trading Frenzies and Their Impact on Real Investment (2010)
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