Speculative trading: the price multiplier effect

TL;DR

This paper demonstrates a linear relationship between peak amplitude and initial price logarithm during speculative episodes, indicating higher stakes lead to more bullish market behavior, with implications for understanding risk affinity.

Contribution

It introduces a quantitative model linking peak amplitude to initial price logarithm, revealing a market-independent parameter and a stable market-dependent parameter.

Findings

Peak amplitude linearly related to log of initial price

Parameter a approximately 0.5 across markets

Parameter b varies by market but remains stable over time

Abstract

During a speculative episode the price of an item jumps from an initial level p_1 to a peak level p_2 before more or less returning to level p_1. 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 p_1 expressed in 1999 euros the relationship takes the form: $ A=a\ln p_1 +b $; the values of the parameter a turn out to be relatively independent of the market considered: $ a \simeq 0.5 $, 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.