Working Paper: NBER ID: w3243
Authors: David M. Cutler; James M. Poterba; Lawrence H. Summers
Abstract: This paper summarizes our earlier research documenting the characteristic speculative dynamics of many asset markets and suggests a framework for understanding them. Our model incorporates "feedback traders," traders whose demand is based on the history of past returns rather than the expectation of future fundamentals. We use this framework to describe ways in which the characteristic return patterns might be generated, and also to address the long-standing question of whether profitable speculation stabilizes asset markets.
Keywords: speculative dynamics; feedback traders; asset markets; efficient markets hypothesis
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| feedback traders (F19) | asset market dynamics (G19) |
| feedback traders (F19) | positive autocorrelation in excess returns (C22) |
| deviations from fundamental values (D46) | future returns (G17) |
| historical price movements (N23) | feedback traders' demand (F16) |
| positive autocorrelation in excess returns (C22) | future increases in returns (G17) |
| negative autocorrelation in returns (C22) | market reversal effects (G14) |