Cross-asset speculation in stock markets

Dan Bernhardt, Bart Taub

Research output: Contribution to journalArticlepeer-review

Abstract

In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross-asset factor structure of order flows to that of returns.

Original languageEnglish (US)
Pages (from-to)2385-2427
Number of pages43
JournalJournal of Finance
Volume63
Issue number5
DOIs
StatePublished - Oct 1 2008

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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