CoChat
Sign Up
PreprintCited by 4Economic theories and modelsFinancial Markets and Investment StrategiesMonetary Policy and Economic Impact

The DOI matches its Crossref record.

Does Speculation in Financial Markets Have Real Effects?

Open access
Li, Tao, Loewenstein, Mark·2014·SSRN Electronic Journal
DOI 10.2139/ssrn.2423360
Open this paper in CoChat — free account

Abstract

We model investors with recursive preferences who disagree about real productivity and extraneous risks in a production economy with piece-wise linear convex adjustment costs. The discontinuous marginal adjustment costs, jointly with disagreement, result in shifts between the “smooth” and “sticky” equilibrium investment phases. Speculation in financial markets, especially on extraneous risk, can decrease or increase real investment and asset prices depending on whether investors’ EIS is less or greater than 1. Speculation on extraneous risk increases asset (consumption/investment) volatility when equilibrium investment policy is “sticky” (“smooth”). Quantitative studies show disagreement over extraneous risk can explain the variations in aggregate investment, valuation, and volatility of the S&P 500 index.

Overview

The claims and statistics of this paper haven’t been checked yet.

Run the check — free, no account needed. It reads the open-access text and checks the sources it cites.

A few free checks a day · papers already verified open instantly · results are public

Integrity signals

Registry

Crossref · 10.2139/ssrn.2423360

Cites

Statistics

Verification

Claims the paper makes

The claims and statistics of this paper haven’t been checked yet.

Run the check — free, no account needed. It reads the open-access text and checks the sources it cites.

A few free checks a day · papers already verified open instantly · results are public

Self-check

Percentages, sums and reported differences re-computed from the paper’s own numbers.

The self-check needs the paper’s full text.

Citations

Cites

No references could be resolved yet.

Research works printed but not linked: 61

  1. S Arif, 2014, Aggregate Investment and Investor Sentiment, Review of Financial Studies, 27, 3241, 10.1093/rfs/hhu054 · DOI
  2. R Bachmann, 2013, Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model, 5, 29
  3. S R Baker, 2016, Measuring Economic Policy Uncertainty, Quarterly Journal of Economics, 131, 1593, 10.1093/qje/qjw024 · DOI · Paper page
  4. S D Baker, 2016, Disagreement, Speculation, and Aggregate Investment, Journal of Financial Economics, 119, 210, 10.1016/j.jfineco.2015.08.014 · DOI
  5. R Bansal, 2004, Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles, Journal of Finance, 59, 1481, 10.1111/j.1540-6261.2004.00670.x · DOI
  6. S Basak, 2000, A Model of Dynamic Equilibrium Asset Pricing with Heterogeneous Beliefs and Extraneous Risk, Journal of Economic Dynamics and Control, 24, 63, 10.1016/S0165-1889(98)00064-5 · DOI
  7. G Bertola, 1990, Kinked Adjustment Costs and Aggregate Dynamics, NBER Macroeconomics Annual, 5, 237, 10.1086/654143 · DOI
  8. G Bertola, 1994, Irreversibility and Aggregate Investment, Review of Economic Studies, 61, 223, 10.2307/2297979 · DOI
  9. H S Bhamra, 2014, Asset Prices with Heterogeneity in Preferences and Beliefs, Review of Financial Studies, 27, 519, 10.1093/rfs/hht051 · DOI
  10. P Bond, 2012, The Real Effects of Financial Markets, Annual Review of Financial Economics, 4, 339, 10.1146/annurev-financial-110311-101826 · DOI
  11. J Borovi?ka, 2020, Survival and Long-Run Dynamics with Heterogeneous Beliefs under Recursive Preferences, Journal of Political Economy, 128, 206, 10.1086/704072 · DOI
  12. A Buss, 2016, The Intended and Unintended Consequences of Financial-Market Regulations: A General-Equilibrium Analysis, Journal of Monetary Economics, 81, 25, 10.1016/j.jmoneco.2016.03.008 · DOI
  13. Q Chen, 2007, Price Informativeness and Investment Sensitivity to Stock Price, Review of Financial Studies, 20, 619, 10.1093/rfs/hhl024 · DOI
  14. P Collin-Dufresne, 2016, Asset Pricing When 'This Time Is Different, Review of Financial Studies, 30, 505, 10.1093/rfs/hhw084 · DOI
  15. R Cooper, 2006, On the Nature of Capital Adjustment Costs, Review of Economic Studies, 73, 611, 10.1111/j.1467-937X.2006.00389.x · DOI
  16. R Cooper, 1999, Machine Replacement and the Business Cycle: Lumps and Bumps, 89, 921
  17. J Cox, 1989, Optimal Consumption and Portfolio Policies when Asset Prices Follow a Diffusion Process, Journal of Economic Theory, 49, 33, 10.1016/0022-0531(89)90067-7 · DOI
  18. J Cox, 1985, An Intertemporal General Equilibrium Model of Asset Prices, Econometrica, 53, 363, 10.2307/1911241 · DOI
  19. J Cvitani?, 2011, Financial Markets Equilibrium with Heterogeneous Agents, Review of Finance
  20. J Detemple, 1994, Intertemporal Asset Pricing with Heterogeneous Beliefs, Journal of Economic Theory, 62, 294, 10.1006/jeth.1994.1017 · DOI
  21. S Di Tella, 2026, The Zero Beta Interest Rate, Journal of Political Economy, 134
  22. Duffie, 1992, Stochastic Differential Utility, Econometrica, 60, 353, 10.2307/2951600 · DOI
  23. Duffie, 1985, Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-Lived Securities, Econometrica, 53, 1337, 10.2307/1913211 · DOI
  24. Duffie, 1994, Continuous-time Security Pricing: A Utility Gradient Approach, Journal of Mathematical Economics, 23, 107, 10.1016/0304-4068(94)90001-9 · DOI
  25. B Dumas, 1989, Two-Person Dynamic Equilibrium in the Capital Market, Review of Financial Studies, 2, 157, 10.1093/rfs/2.2.157 · DOI
  26. B Dumas, 2000, Efficient Intertemporal Allocations with Recursive Utility, Journal of Economic Theory, 93, 240, 10.1006/jeth.2000.2656 · DOI
  27. A Edmans, 2012, The Real Effects of Financial Markets: The Impact of Prices on Takeovers, Journal of Finance, 67, 933, 10.1111/j.1540-6261.2012.01738.x · DOI
  28. A Edmans, 2015, Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage, American Economic Review, 105, 3766, 10.1257/aer.20141271 · DOI
  29. L G Epstein, 1989, Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework, Econometrica, 57, 937, 10.2307/1913778 · DOI
  30. L G Epstein, 1991, Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis, Journal of Political Economy, 99, 263, 10.1086/261750 · DOI
  31. M Gallmeyer, 2008, An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy, Review of Finance, 12, 323, 10.1093/rof/rfm036 · DOI
  32. P.-Y Geoffard, 1996, Discounting and Optimizing: Capital Accumulation Problems as Variational Minmax Problems, Journal of Economic Theory, 69, 53, 10.1006/jeth.1996.0037 · DOI
  33. I Goldstein, 2008, Manipulation and the Allocational Role of Prices, Review of Economic Studies, 75, 133, 10.1111/j.1467-937X.2007.00467.x · DOI
  34. T Havr�nek, 2015, Measuring Intertemporal Substitution: The Importance Of Method Choices And Selective Reporting, Journal of the European Economic Association, 13, 1180, 10.1111/jeea.12133 · DOI
  35. N Jaimovich, 2009, Can News about the Future Drive the Business Cycle?, Aemerican Economic Review, 99, 1097, 10.1257/aer.99.4.1097 · DOI
  36. D M Kreps, 1978, Temporal Resolution of Uncertainty and Dynamic Choice Theory, Econometrica, 46, 185, 10.2307/1913656 · DOI
  37. M Lenel, 2019, The short rate disconnect in a monetary economy, Journal of Monetary Economics, 106, 59, 10.1016/j.jmoneco.2019.07.008 · DOI
  38. T Li, 2007, Heterogeneous Beliefs, Asset Prices, and Volatility in a Pure Exchange Economy, Journal of Economic Dynamics and Control, 31, 1697, 10.1016/j.jedc.2006.06.003 · DOI
  39. T Li, 2013, Investors' Heterogeneity and Implied Volatility Smiles, Management Science, 59, 2392, 10.1287/mnsc.2013.1712 · DOI
  40. T Li, 2010, Heterogeneity and Volatility Puzzles in International Finance, Journal of Financial and Quantitative Analysis, 45, 1485, 10.1017/S0022109010000530 · DOI
  41. M Loewenstein, 2013, Speculation and Leverage
  42. S Malamud, 2008, Universal Bounds for Asset Prices in Heterogeneous Economies, Finance and Stochastics, 12, 411, 10.1007/s00780-008-0062-z · DOI
  43. S Panageas, 2005, The Neoclassical Theory of Investment in Speculative Markets
  44. R Pindyck, 2013, The Economic and Policy Consequences of Catastrophes, American Economic Journal: Economic Policy, 5, 306
  45. M Schroder, 1999, Optimal Consumption and Portfolio Selection with Stochastic Differential Utility, Journal of Economic Theory, 89, 68, 10.1006/jeth.1999.2558 · DOI
  46. A Vissing-J�rgensen, 2002, Limited Asset Market Participation and the Elasticity of Intertemporal Substitution, Journal of Political Economy, 110, 825, 10.1086/340782 · DOI
  47. W Xiong, 2010, Heterogeneous Expectations and Bond Markets, Review of Financial Studies, 23, 1433, 10.1093/rfs/hhp091 · DOI
  48. H Yan, 2008, Natural Selection in Financial Markets: Does It Work?, Management Science, 54, 1935, 10.1287/mnsc.1080.0911 · DOI
  49. F Zapatero, 1998, Effects of Financial Innovations on Market Volatility when Beliefs Are Heterogeneous, Journal of Economic Dynamics and Control, 22, 597, 10.1016/S0165-1889(97)00076-6 · DOI
  50. L M Benveniste, 1979, On the Differentiability of the Value Function in Dynamic Models of Economics, Econometrica, 47, 727, 10.2307/1910417 · DOI
  51. J Borovi?ka, 2020, Survival and Long-Run Dynamics with Heterogeneous Beliefs under Recursive Preferences, Journal of Political Economy, 128, 206, 10.1086/704072 · DOI
  52. J Cox, 1985, An Intertemporal General Equilibrium Model of Asset Prices, Econometrica, 53, 363, 10.2307/1911241 · DOI
  53. Duffie, 1985, Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-Lived Securities, Econometrica, 53, 1337, 10.2307/1913211 · DOI
  54. Duffie, 1994, Continuous-time Security Pricing: A Utility Gradient Approach, Journal of Mathematical Economics, 23, 107, 10.1016/0304-4068(94)90001-9 · DOI
  55. D Duffie, 1994, Efficient and Equilibrium Allocations with Stochastic Differential Utility, Journal of Mathematical Economics, 23, 133, 10.1016/0304-4068(94)90002-7 · DOI
  56. B Dumas, 2000, Efficient Intertemporal Allocations with Recursive Utility, Journal of Economic Theory, 93, 240, 10.1006/jeth.2000.2656 · DOI
  57. B.-G Jang, 2007, Liquidity Premia and Transaction Costs, The Journal of Finance, 62, 2329, 10.1111/j.1540-6261.2007.01277.x · DOI
  58. I K Karatzas, 1991, Brownian Motion and Stochastic Calculus
  59. P E Protter, 2005, Stochastic Integration and Differential Equations, 10.1007/978-3-662-10061-5 · DOI
  60. R Rockafellar, 1970, Convex Analysis, 10.1515/9781400873173 · DOI
  61. H Royden, 1988, Real Analysis

Cited by

Sorted by citations

See all 4

Metadata

Authors
Li, T., & Loewenstein, M.
Affiliations
  • City University of Hong Kong (HK)
  • University of Maryland, College Park (US)
Corresponding author
Li, Tao
ORCID
Li, Tao
Venue
SSRN Electronic Journal
Publisher
Elsevier BV
Published
2014
ISSN
1556-5068 (ISSN-L)
DOI
10.2139/ssrn.2423360
OpenAlex
W1487903923
Cited by
4
References
0
Citations by year
2024: 1 · 2016: 3
Type
posted content
Language
en
Open access
Locations
SSRN Electronic Journal (acceptedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
Keywords
speculation, recursive preferences, investor disagreement, real investment, convex adjustment costs, asset price volatility, S&P 500, production economy

About these checks

Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.

Statistics and arithmetic are recomputed, not judged.

Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.

What counts as a claim ›How we measure confidence ›How we check this ›

Are you an author, or do you see a problem with this page? Request a review

How to cite

Cite CoChat for the checks on this page, and the paper for its own findings.

This page
CoChat. (2026). Citation check: Does Speculation in Financial Markets Have Real Effects? https://app.cochat.ai/papers/10.2139/ssrn.2423360
The paper
Li, T., & Loewenstein, M. (2014). Does Speculation in Financial Markets Have Real Effects? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2423360