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.
*Published:
The American Economic Review, Vol. 80, No. 2, pp. 63-68, (May 1990).
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