Positive Feedback Investment Strategies and Destabilizing Rational Speculation

Long, J. Bradford De; Shleifer, Andrei; Summers, Lawrence H.; Waldmann, Robert

doi:10.2307/2328662

Cited by 902 publications

(778 citation statements)

References 16 publications

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“…While the first result is in line with the finding of Guenster et al (2008) and the theoretical models of Abreu and Brunnermeier (2003) and De Long et al (1990b) the second result is at first sight quiet surprising. Traditionally, bubbles are thought of as zero-sum games and one expects crashes to wipe out all gains previously accrued.…”

Section: Investment Horizon and Optimal Portfolio Weightsupporting

confidence: 82%

“…For these investors, previous theoretical and empirical research suggests that their optimal strategy changes along their horizon. It seems that the theoretical predictions made by Abreu andBrunnermeier (2003) andDe Long et al (1990b) are applicable for investors with a very short, one-month horizon. As the investor's horizon increases and simultaneously the risk that the bubble starts deflating, the propositions of the limits-to-arbitrage literature might be become increasingly relevant.…”

Section: Empirical Literaturementioning

confidence: 99%

“…In the first model, written by De Long et al (1990b), the market consists of feedback traders and rational arbitrageurs. The feedback traders demand is positively correlated with past price changes.…”

Section: Theoretical Literaturementioning

confidence: 99%

“…In determining his optimal allocation he has to take into account that his inference may be wrong. This approach allows us to describe a more realistic setting than most theoretical models, where at least a fraction of investors knows with certainty that the price contains a bubble component (see among others Abreu and Brunnermeier (2003), De Long et al (1990b), or De Long et al (1990a). …”

Section: Model Designmentioning

confidence: 99%

“…In turn, De Long et al (1990b) and Abreu and Brunnermeier (2003) suggest that investors should ride the bubble at short horizons and sell out as the risk of the crash increases.…”

Section: Introductionmentioning

confidence: 99%

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Bubbles and Investment Horizons

Guenster

Kole

2009

SSRN Journal

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The current theoretical literature makes contradicting predictions regarding the impact of an investor's horizon on his optimal trading strategy in the presence of bubbles. We analyze this relation empirically using a Regime Switching Model to identify bubbles and crashes. We base our analysis on industry returns and find high positive returns after bubbles at the one-month horizon. At intermediate horizons of 2-4 months our findings are mixed, but thereafter, for horizons up to five years, returns following a bubble are again more positive than returns in the absence of a bubble. We compare a mean-variance as well as a downside-risk averse investor's portfolio allocation in the presence and absence of a bubble. The weight allocated to the bubbly asset is higher for horizons up to 5 years. These findings suggest that even for a rather unsophisticated trader who does not follow daily market news, riding bubbles is a more profitable strategy than refraining from investing in the bubbly asset. Given the broad range of horizons during which riding bubbles is the optimal strategy, our results question the idea that bubbles are zero-sum games.

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Section: Investment Horizon and Optimal Portfolio Weightsupporting

confidence: 82%

Section: Empirical Literaturementioning

confidence: 99%

Section: Theoretical Literaturementioning

confidence: 99%

Section: Model Designmentioning

confidence: 99%

“…In turn, De Long et al (1990b) and Abreu and Brunnermeier (2003) suggest that investors should ride the bubble at short horizons and sell out as the risk of the crash increases.…”

Section: Introductionmentioning

confidence: 99%

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Bubbles and Investment Horizons

Guenster

Kole

2009

SSRN Journal

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An examination of linear and nonlinear causal relationships between price variability and volume in petroleum futures markets

Fujihara¹,

Mougoué

1997

J. Fut. Mark.

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Fujihara and Mougoue tegralreveals significant bidirectional nonlinear causal relationships between the filtered returns and volume series. Using a third-order moment test, this study finds that the nonlinear dependence in the futures returns and volume series arises from the variance, rather than the mean, of the process. Consequently, the filtered returns and volume series are adjusted for conditional heteroscedasticity. The study then examines the GARCHfiltered returns and volume series and finds that, even after adjusting for volatility effects, there is still strong evidence of bidirectional nonlinear Granger causality and concludes that the nonlinear process may influence both the mean and variance of futures returns and volume. The finding of strong nonlinear causal relationships between petroleum futures returns and trading volume implies that knowledge of current trading volume improves the ability to forecast futures prices. Thus, the results of this study should be useful to regulators, practitioners, and futures markets participants whose success hinges crucially on the ability to forecast futures price movements.

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