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Investment, speculation, and financial regulation

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  • Viktor Tsyrennikov

    (IMF)

Abstract

We study a production economy in which agents have heterogeneous beliefs. When wealth is distributed evenly belief diversity depresses investment because the negative impact of pessimists outweighs the positive impact of optimists. Wealth volatility, driven by speculation, depresses investment further. Through a series of numerical simulations we show that imposing 'leverage-like' financial constraints on agents limits wealth movements, boosts investment, and significantly improves welfare.

Suggested Citation

  • Viktor Tsyrennikov, 2015. "Investment, speculation, and financial regulation," 2015 Meeting Papers 627, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:627
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    References listed on IDEAS

    as
    1. Timothy Cogley & Thomas J. Sargent & Viktor Tsyrennikov, 2014. "Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs," Economic Journal, Royal Economic Society, vol. 124(575), pages 1-30, March.
    2. Dan Vu Cao, 2010. "Collateral Shortages, Asset Price And Investment Volatility With Heterogeneous Beliefs," 2010 Meeting Papers 1233, Society for Economic Dynamics.
    3. Itzhak Gilboa & Larry Samuelson & David Schmeidler, 2014. "No‐Betting‐Pareto Dominance," Econometrica, Econometric Society, vol. 82(4), pages 1405-1442, July.
    4. Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, July.
    5. Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
    6. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    7. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    8. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    9. 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:

    1. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.

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