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Discussion Paper Details

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Title: Trading Frenzies and Their Impact on Real Investment

Author(s): Itay Goldstein, Emre Ozdenoren and Kathy Yuan

Publication Date: January 2010

Keyword(s): Coordination, Financial markets, Heterogenous Information, Learning and Liquidity

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Goldstein, I, Ozdenoren, E and Yuan, K. 2010. 'Trading Frenzies and Their Impact on Real Investment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7652