Short-term Speculation Research Articles

Short-term speculators and the puzzling behaviour of exchange rates

Abstract This paper shows that rational short-term speculative activity transforms exchange rates' response to shocks. Transitory shocks will have a permanent impact on exchange rates when such speculators are active, and the impact of shocks will be smoothed. The model may help explain the observed extended response of exchange rates to sterilized intervention. Further, the model suggests that exchange rate fundamentals may be properly identified even when those variables fail to forecast better than a random walk. Finally, the model could help explain why exchange rates closely resemble a random walk while most fundamentals do not follow such a process.

Stock price volatility, transactions costs and securities transactions taxes

Securities Transactions Taxes (STTs) are intended to reduce or eliminate excessive volatility in stock prices caused by short-term speculative trading. To examine the implicit assumption that stock price volatility is caused by short-term trading, we investigate the relationship between volatility and bid-ask spreads, since short-term speculative traders and other investors with short time horizons will prefer stocks with low transactions costs. Our finding, that volatility is actually associated with high transactions costs, is inconsistent with the ‘speculator’ story. Our study suggests that the effect of an STT may be to impede the adjustment of stock prices to new information, rather than to curb ‘excessive short-term speculation’. © 1997 John Wiley & Sons, Ltd.

Stock price volatility, transactions costs and securities transactions taxes

Securities Transactions Taxes (STTs) are intended to reduce or eliminate excessive volatility in stock prices caused by short-term speculative trading. To examine the implicit assumption that stock price volatility is caused by short-term trading, we investigate the relationship between volatility and bid-ask spreads, since short-term speculative traders and other investors with short time horizons will prefer stocks with low transactions costs. Our finding, that volatility is actually associated with high transactions costs, is inconsistent with the ‘speculator’ story. Our study suggests that the effect of an STT may be to impede the adjustment of stock prices to new information, rather than to curb ‘excessive short-term speculation’. © 1997 John Wiley & Sons, Ltd.

ARE GRAINS OF SAND IN THE WHEELS OF INTERNATIONAL FINANCE SUFFICIENT TO DO THE JOB WHEN BOULDERS ARE OFTEN REQUIRED?*

This paper criticises the effectiveness of a Tobin tax in acting as a deterrent to short-run round trip speculation on exchange rate movements. It is demonstrated that given the usual magnitude of a proposed Tobin tax, the deterrent to short-term speculation will be negligible and in all likelihood smaller than the deterrent to real trade flows and arbitrage activities. Finally, an alternative proposal for preventing currency speculations while creating incentives for global full employment, based on Keynes's 1940s writings, is proposed.

Exchange rate dynamics and speculator horizons

Abstract This paper shows that exchange rate dynamics and speculators' horizons are determined simultaneously. A speculator's horizon choice depends on exchange rate dynamics, since these determine the risks and returns associated with speculative activity. These risks and returns, in turn, are affected by speculators' horizons. For example, a shift of speculators from short to long horizons reduces exchange rate variability at the longer horizon relative to its variability at the shorter horizon. The paper finds that the equilibrium share of short-term speculators depends on a number of factors, including market liquidity and the generating processes of the underlying shocks. The paper also shows that there may be no a priori reason for society to prefer that speculators operate at any particular horizon.

Restructuring economic and financial power: The potential role of a foreign exchange-transaction levy

National fiscal and monetary policies are dominated by financial markets, and the obsession of these markets with inflation is forcing governments to neglect other crucial economic and social goals such as growth of employment and reduction of poverty. Exchange rate volatility also adds to business costs and risk. Introduction of a small international levy on foreign exchange transactions would reduce short-term speculation and so the power of the markets to influence interest rates and to destabilize exchange rates. Revenue from the levy would be of benefit to both national governments and the UN for disaster relief, development and strengthened security programmes. Support for the levy is growing.

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

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.

When financial markets work too well: A cautious case for a securities transactions tax

Unlike most major industrialized nations, the United States does not impose an excise tax on securities transactions. This article examines the desirability and feasibility of implementating a U.S. Securities Transfer Excise Tax (STET) directed at curbing excesses associated with short-term speculation and at raising revenue. We conclude that strong economic efficiency arguments can be made in support of a STET that throws “sand into the gears,” in James Tobin's (1982) phrase, of our excessively well-functioning financial markets. Such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers. The efficiency benefits derived from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital that come from taxing financial transactions more heavily. The examples of Japan and the United Kingdom suggest that a STET is administratively feasible and can be implemented without crippling the competitiveness of U.S. financial markets. A STET at a .5% rate could raise revenues of at least $10 billion annually.

Speculation and Housing Prices

The effect of short-term speculation on the stability of house prices is examined in this article. It describes speculative activity in the 1979-1981 Vancouver housing market. A series of regressions show that short-term speculators diminished rather than amplified price fluctuations. The dramatic swing in Vancouver's housing prices during the study period is explained by speculation on the part of all home buyers.

Is There a Difference between Investing and Gambling? A Christian Perspective

To an economist, investment represents a mutually beneficial transfer of capital that fuels the engine of economic growth and leads to improved standards of living. A gamble tends to be an entertaining, zero-sum, short-term bet. The increasing popularity of a gambling culture along with increasing short-term speculation with derivative financial instruments has blurred the line between investing and gambling. This paper considers a biblical perspective on investment and gambling and seeks to delineate the two.

Leads and Lags in Sterling Payments

M ONTHLY statistics of the sterling area's trade and payments position with Western Europe and North America indicate that a substantial volume of short-term speculation in sterling has taken place since the end of I948 and that inward as well as outward movements of capital have occurred. The pressure against sterling resulting from this speculation has been recognized as a significant factor contributing to the I949 devaluation as well as to the loss of reserves incurred in I95I-52. The short-term flows of funds into and out of sterling, which have been induced principally by the expectation of changes in exchange rates, have been of a disequilibrating character. These transactions have taken the form of leads and lags in sterling payments by merchants in connection with their normal trading operations: hence, this speculation has been effected within the framework of rigorous controls over exchange and foreign trade transactions which have blocked short-term money movements of the pre-i939 character.