Does Speculation in Financial Markets Have Real Effects?

Date: Friday, March 8, 2019, 16:30 to 17:30

Title: Does Speculation in Financial Markets Have Real Effects?

Speaker:  Prof. Tao Li, the City University of Hong Kong.

Abstract: We examine how opening financial markets for trade in real and "extraneous" risks can affect production decisions and asset prices. Agents have heterogeneous beliefs about these risks and trade in financial markets. We find that speculation, especially in "extraneous" risks uncorrelated with productivity can significantly affect production decisions. Speculation can either decrease or increase real investment and asset prices, even in the presence of adjustment costs or irreversibility in capital investments. Since housing construction is a largely irreversible investment, our model can help explain boom-and-bust cycles in housing construction and prices by speculative activity in the financial markets.

Biography: Tao Li is an associate professor of finance at the City University of Hong Kong. He graduated from Washington University in St. Louis with a Ph.D. in Finance. His research spans equilibrium asset pricing with heterogeneous agents, term structure of interest rates and credit risk, market microstructure and its interactions with corporate governance. He published research papers in Econometrica, Review of Financial Studies, Management Science, Journal of Financial and Quantitative Analysis, and Journal of Economic Dynamic and Control.

Venue: Room 513 William M.Mong Engineering Building (Engineering Building II), the Chinese University of Hong Kong.


Friday, March 8, 2019 - 16:30 to 17:30