Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation
Kenneth A. Froot
David S. Scharfstein
Jeremy C. Stein
Standard models of informed speculation suggest that traders try to learn information
that others do not have. This result implicitly relies on the assumption
that speculators have long horizons, i.e, can hold the asset forever. By contrast,
we show that if speculators have short horizons, they may herd on the same information,
trying to learn what other informed traders also know. There can be
multiple herding equilibria, and herding speculators may even choose to study
information that is completely unrelated to fundamentals. These equilibria are
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