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

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Does Speculation in Financial Markets Have Real Effects?

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Li, Tao, Loewenstein, Mark·2014·SSRN Electronic Journal
DOI 10.2139/ssrn.2423360
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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.

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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

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