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Journal of Finance Vol. 72 No. 6 2017

Nonfundamental Speculation Revisited

Liyan Yang; Haoxiang Zhu1

1 Social Sciences and Humanities Research Council

open access

Abstract

We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second‐order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.

DOI
10.1111/jofi.12548
Volume
72
Issue
6
Pages
2759-2772
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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