Financial crises in efficient markets: How fundamentalists fuel volatility

Ariane Szafarz

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: When a financial crisis breaks out, speculators typically get the blame whereas fundamentalists are presented as the safeguard against excessive volatility. This paper proposes an asset pricing model where two types of rational traders coexist: short-term speculators and long-term fundamentalists, both sharing the same information set. In this framework, excess volatility not only exists, but is actually fueled by fundamental trading. Consequently, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit rational speculation might, surprisingly, end up increasing volatility. © 2011 Elsevier B.V.

Keywords: Efficient markets; Fundamentalists; Liquidity; Speculative bubbles; Speculators (search for similar items in EconPapers)
Date: 2012-01
Note: SCOPUS: ar.j
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Published in: Journal of banking & finance (2012) v.36 n° 1,p.105-111

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Financial crises in efficient markets: How fundamentalists fuel volatility (2012)
Working Paper: Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulb:ulbeco:2013/149191

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/149191

Access Statistics for this paper

More papers in ULB Institutional Repository from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().