Speculative Dynamics of Prices and Volume
Charles Nathanson and
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Eric Zwick: University of Chicago
Charles Nathanson: Northwestern University
No 239, 2017 Meeting Papers from Society for Economic Dynamics
We present a dynamic theory of prices and volume in asset bubbles. In our framework, predictable price increases endogenously attract short-term investors more strongly than long-term investors. Short-term investors amplify volume by selling more frequently, and they destabilize prices through positive feedback. Our model predicts a lead-lag relationship between volume and prices that we conrm in the 2000-2008 US housing bubble. Using data on 50 million home sales from this episode, we document that much of the variation in volume arose from the rise and fall in short-term investment.
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