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Price Destabilizing Speculation

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  • Hart, Oliver D.
  • Kreps, David M.

Abstract

It is sometimes asserted that rational speculative activity must result in more stable prices because speculators buy when prices are low and sell when they are high. This is incorrect. Speculators buy when the chances of price appreciation are high, selling when the chances are low. Speculative activity in an economy in which all agents are rational, have identical priors, and have access to identical information may destabilize prices, under any reasonable definition of destabilization. It takes extremely strong conditions to ensure that speculative activity (of the commodity storage variety) "stabilizes" prices, even in a very weak sense.

Suggested Citation

  • Hart, Oliver D. & Kreps, David M., 1986. "Price Destabilizing Speculation," Scholarly Articles 3448679, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3448679
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    References listed on IDEAS

    as
    1. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
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    3. Shiller, Robert J, 1981. "The Use of Volatility Measures in Assessing Market Efficiency," Journal of Finance, American Finance Association, vol. 36(2), pages 291-304, May.
    4. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    5. Kohn, Meir, 1978. "Competitive Speculation," Econometrica, Econometric Society, vol. 46(5), pages 1061-1076, September.
    6. José A. Scheinkman & Jack Schechtman, 1983. "A Simple Competitive Model with Production and Storage," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(3), pages 427-441.
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