Asset prices can be influenced by market speculation from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
Market speculation can have a significant impact on asset prices. Speculation refers to the act of trading assets based not on their intrinsic value, but on the expectation of future price movements. When investors speculate on the future direction of asset prices, they can drive prices up or down, creating opportunities for profit. Speculation can cause asset prices to deviate from their fundamental values. In efficient markets, asset prices should reflect all available information and the intrinsic value of the asset. However, when speculation enters the picture, prices can become disconnected from these fundamental values. This can lead to price bubbles, where asset prices are driven to unsustainable levels by speculative activity. The influence of market speculation on asset prices can be seen in various financial markets. For example, in the stock market, speculation can drive up the prices of certain stocks based on rumors or hype, rather than on the company's actual performance. In the housing market, speculation can lead to rapid price increases as investors buy properties with the expectation of selling them at a higher price in the future. Speculation can also amplify price movements in both directions. When investors are optimistic about the future, speculation can drive prices higher as investors buy assets in anticipation of further price increases. Conversely, when investors become pessimistic, speculation can lead to a sharp decline in prices as investors sell off assets in anticipation of further losses.- Market speculation can play a significant role in influencing asset prices. Investors should be aware of the impact that speculation can have on prices and be cautious when making investment decisions based on speculative activity. By understanding the role of speculation in the markets, investors can better navigate the complexities of asset pricing and make more informed investment choices.
