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Legitimate speculation versus excessive speculation

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  • Damir Tokic

    (International University of Monaco/INSEEC Paris)

Abstract

The literature suggests that excessive speculation is hard to define, and thus difficult to regulate. The aim of this article is to provide a framework to differentiate between legitimate speculation and excessive speculation, using the efficient market mechanism as a guide (or blueprint). Specifically, I argue that all speculative strategies that improve market efficiency, based on public information, with no predatory/manipulative elements, can be classified as legitimate speculation, while all speculative strategies that purposely cause market inefficiencies, with predatory/manipulative behavior, can be classified as excessive speculation. Accordingly, I classify rational arbitrage, discretionary trading and systematic trend-following as legitimate speculation, which should be encouraged. Using the same framework, I classify insider trading, rational destabilizing speculation and arbitraging arbitragers as excessive speculation, which must be regulated.

Suggested Citation

  • Damir Tokic, 2014. "Legitimate speculation versus excessive speculation," Journal of Asset Management, Palgrave Macmillan, vol. 15(6), pages 378-391, December.
    • Handle: RePEc:pal:assmgt:v:15:y:2014:i:6:d:10.1057_jam.2014.33
    DOI: 10.1057/jam.2014.33
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    References listed on IDEAS

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    1. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Tokic, Damir, 2011. "Rational destabilizing speculation, positive feedback trading, and the oil bubble of 2008," Energy Policy, Elsevier, vol. 39(4), pages 2051-2061, April.
    3. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    4. Mukarram Attari & Antonio S. Mello & Martin E. Ruckes, 2005. "Arbitraging Arbitrageurs," Journal of Finance, American Finance Association, vol. 60(5), pages 2471-2511, October.
    5. Bruce Ian Carlin & Miguel Sousa Lobo & S. Viswanathan, 2007. "Episodic Liquidity Crises: Cooperative and Predatory Trading," Journal of Finance, American Finance Association, vol. 62(5), pages 2235-2274, October.
    6. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
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    Cited by:

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    2. Huck, Nicolas & Mavoori, Hareesh & Mesly, Olivier, 2020. "The rationality of irrationality in times of financial crises," Economic Modelling, Elsevier, vol. 89(C), pages 337-350.

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