Positive Feedback Investment Strategies and Destabilizing Rational Speculation

J. Bradford De Long, Andrei Shleifer, Lawrence Summers and Robert Waldmann ()

Scholarly Articles from Harvard University Department of Economics

Abstract: Analyses of the role of rational speculators in financial markets usually presume that such investors dampen price fluctuations by trading against liquidity or noise traders. This conclusion does not necessarily hold when noise traders follow positive-feedback investment strategies buy when prices rise and sell when prices fall. In such cases, it may pay rational speculators to try to jump on the bandwagon early and to purchase ahead of noise trader demand. If rational speculators' attempts to jump on the bandwagon early trigger positive-feedback investment strategies, then an increase in the number of forward-looking rational speculators can lead to increased volatility of prices about fundamentals.

Date: 1990
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Published in The Journal of Finance

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Related works:
Journal Article: Positive Feedback Investment Strategies and Destabilizing Rational Speculation (1990)
Working Paper: Positive Feedback Investment Strategies and Destabilizing Rational Speculation (1989)
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