Does Speculation in Financial Markets Have Real Effects?

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review

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Detail(s)

Original languageEnglish
Number of pages52
Publication statusPresented - 17 Aug 2020

Conference

TitleEconometric Society World Congress 2020
LocationBocconi University
PlaceItaly
CityMilan
Period17 - 21 August 2020

Abstract

This paper examines how speculation in financial markets can affect real investments and asset prices with asymmetric adjustment costs. Investors with recursive preferences have heterogeneous beliefs about real productivity and extraneous risk uncorrelated with productivity. Speculation in financial markets, even on extraneous risk uncorrelated, can significantly affect real investment and asset prices. Speculation can either decrease or increase real investment and asset prices depending on whether investors elasticity of intertemporal substitution (EIS) is less or greater than 1. With the EIS above 1, speculation can generate various boom-and-bust patterns such as what happened in the recent US housing markets.

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Citation Format(s)

Does Speculation in Financial Markets Have Real Effects? / Li, Tao; Loewenstein, Mark.

2020. Econometric Society World Congress 2020, Milan, Italy.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paperpeer-review