NONFUNDAMENTAL SPECULATION

We study an intertemporal asset market where insiders coexist with ''n on-fundamental'' speculators. Non-fundamental speculators possess no p rivate information on fundamental values of assets, but have superior knowledge about some aspect of the market environment. We show that th e entry of these (rational) speculators can lead to reductions in mark et liquidity and in the information content of prices, even in an effi cient market. Also, equilibrium trades display patterns of empirical i nterest. For example, speculators appear to chase trends and lose mone y after market ''overreactions,'' while insiders trade as contrarians and profit after such overreactions.