Speculative trading: the price multiplier effect

Abstract:

During a speculative episode the price of an item jumps from an initial level p₁ to a peak level p₂ before more or less returning to level p₁ . The ratio p ₂/p ₁ is referred to as the amplitude A of the peak. This paper shows that for a given market the peak amplitude is a linear function of the logarithm of the price at the beginning of the speculative episode; with p₁ expressed in 1999 euros the relationship takes the form: ; the values of the parameter a turn out to be relatively independent of the market considered: , the values of the parameter b are more market-dependent, but are stable in the course of time for a given market. This relationship suggests that the higher the stakes the more “bullish” the market becomes. Possible mechanisms of this “risk affinity” effect are discussed.