Manipulating market sentiment

We analyze a simple model of an asset market, in which a large rational trader interacts with ‘‘noise speculators’’ who seek short-run speculative gains, and become active following a prolonged episode of mispricing relative to the asset’s fundamental value. Themodel gives rise to price patterns such as bubble dynamics, positive short-run correlation and vanishing long-run correlation of price deviations from the fundamental value. We argue that this example model sheds light on the question as to whether rational speculators abet or curb price fluctuations. © 2014 Elsevier B.V. All rights reserved.