Non-Fundamental Speculation



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    • New York University and Hoover Institution. I would like to thank Yakov Amihud, Darrell Duffie, Jennie France, Charlie Kahn, Hedi Kallal, Jose Scheinkman, Michael Woodford, and seminar participants at New York University, Chicago, and Northwestern for helpful comments. I would especially like to thank a referee and the editor, René Stulz, whose comments substantially improved the style and content of the paper.


We study an intertemporal asset market where insiders coexist with “non-fundamental” speculators. Non-fundamental speculators possess no private information on fundamental values of assets, but have superior knowledge about some aspect of the market environment. We show that the entry of these (rational) speculators can lead to reductions in market liquidity and in the information content of prices, even in an efficient market. Also, equilibrium trades display patterns of empirical interest. For example, speculators appear to chase trends and lose money after market “overreactions,” while insiders trade as contrarians and profit after such overreactions.