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1、Referee ReportForXie Jun (谢俊)10228035The paper presented by De Long, Shleifer, Summers, and Waldmann focused on the issue of the effects rational speculators have on the stock price. The authors observe the prevalence of the positive feedback investors as well as investment strategies in the financi
2、al markets, and from this important sight, they present some discussion on how these investors and investment strategies affect the stock price. There do exists a wide variety of positive feedback strategies in the financial market, which mean buying when prices rise and selling when prices fall. Th
3、ese strategies include portfolio choice based on extrapolative expectations, the use of stop-loss orders, purchases on margin which are liquidated when the stock drops below a certain point, as well as dynamic trading strategies such as portfolio insurance. More importantly, the positive feedback oc
4、curs at many horizons, from several days to several months, even several years. So have some research on such a predominant phenomena is of good significance.The model presented in this paper is very simple, which can be described like following.1. AssumptionsFour periods: 0, 1, 2, 3Two assets: cash
5、, stock. Cash is in perfectly elastic supply and pays no net return; Stock is in zero net supply.Three types of investors: positive feedback traders in a measure of one; informed rational speculators in a measure of passive investors in a measure of 2. Basic descriptionStock is liquidated and pays a
6、 risky dividend equal to in period 3, which is when investors consume all their wealth. is distributed normally with mean zero and variance . No meaningful information about is released at any time before period 3. has mean zero and can take on three possible values: , 0, and . The value of becomes
7、public in period 2, and a signal about is released in period 1.3. The mechanism of the modelIn period 3: there is no trading. Investors pay each other according to the positions they hold in the stock and the dividend.In period 2: Positive feedback traders demands respond to the price change between
8、 period 0 and 1, but not according to the change between period 1 and 2, which is. Rational speculators will hold a positive quantity of stocks in period 2 only when, which is. Passive investors demand is also negatively related to price, which is . In period 1: Rational speculators choose their dem
9、and to maximize the same mean-variance utility function as in period 2. Positive feedback traders demand in period 1 is equal to zero,. Passive investors demand is given by In period 0: Price is set at initial fundamental value of zero, no trading happens.4. SolutionsWith a noiseless signal: With an
10、 imperfectly informative signal: Here is the price of period 2 in case of, is in case of, when under a positive shock to fundamentals.The simple model has some interesting implications. One is that the model generates a positive correlation of stock returns at short horizons, as positive feedback tr
11、aders respond to past price increases by flowing into the market, and negative correlations of stock returns in long horizons, as prices eventually return to fundamentals. The other is that the model predicts that the stock market overreacts to news because such news triggers positive feedback tradi
12、ng.Generally speaking, through a very simple model, this paper puts forward a very interesting explanation other than the traditional one for the stabilizing powers of rational speculation. That is, in the presence of positive feedback investors it might be rational for informed speculators to jump
13、on the bandwagon and not to buck the trend. Because purchases by rational speculators can make positive feedback traders even more excited and so move prices even further away from fundamental values than they would reach in the absence of rational speculators. The key advantages of this paper are:
14、1) Since the positive feedback trading among many market participants is very common, its very helpful for us to understand the dynamics of stock price. 2) The model accords with a variety of literary evidence on asset markets, especially on bubbles. That is, the model can provide some reasonable ex
15、planations for the empirical researches. 3) The model presented in this paper is very simple, but also is very penetrating and meaningful.Still there are some points deserve further study. One is to study who are the main parts in our financial markets who take positive feedback strategies, which is definitely very interesting and meaningful. Second maybe is to compare these two models regarding the effects rational speculators have on the stock price: the model focused on the positive feedback strategies and the traditional model.
