Economics of stock-price vibrations : Riding speculative waves without speculation

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Original languageEnglish
Pages (from-to)529-543
Journal / PublicationPacific Economic Review
Volume12
Issue number5
Publication statusPublished - Dec 2007

Abstract

When speculation causes share prices to fluctuate, even the best speculators may do 'hardly better than the comprehensive common-stock averages' (Samuelson). We further demonstrate in this paper that non-speculators can indeed benefit, in terms of both utility and wealth, from speculative price fluctuations by choosing their portfolio optimally. In particular, we show both how much and how fast non-speculators' wealth can accumulate, presumably at speculators' expenses, over periods of price fluctuations. We also show a seemingly paradoxical outcome where a rational individual would rejoice more when stock prices fall than when they rise by the same (absolute) amounts. © 2007 The Authors. Journal compilation © 2007 Blackwell Publishing Ltd.