Finance Seminar（2015-32）

Topic:Does Speculative Activity Have Real Effects?

Speaker:Tao Li, City University of Hong Kong

Time:Wednesday, 28 October, 10:00-11:30

Location:Room K01, Guanghua Hotel

Abstract:We examine how opening financial markets for trade in real and “extraneous” risks can affect productive decisions. Agents have heterogeneous beliefs over these risks and trade in financial markets. We find that speculation, especially in “extraneous” risks uncorrelated with productivity can significantly affect productive decisions. Speculation can either decrease or increase real investment and asset prices, even in the presence of adjustment costs or irreversibility in capital investments. Since housing construction is a largely irreversible investment, our model can help to explain a boom and bust in housing construction and asset prices resulting from speculative activity in the financial markets.