Review of Economic Studies (1991)58,529-546 0034-6527/91/00320529$02.00 C1991 The Review of Economic Studies Limited Speculative Dynamics DAVID M.CUTLER MIT JAMES M.POTERBA MIT and NBER and LAWRENCE H.SUMMERS Harvard University and NBER First version received January 1990;final version accepted February 1991 (Eds.) This paper presents evidence on the characteristic speculative dynamics of returns on stocks, bonds,foreign exchange,real estate,collectibles,and precious metals.It highlights four stylized facts.First,returns tend to be positively serially correlated at high frequency.Second,they are weakly negatively serially correlated over long horizons.Third,deviations of asset values from proxies for fundamental value have predictive power for returns.Fourth,short term interest rates are negatively correlated with excess returns on other assets.The similarity of the results across markets suggests that they may be due to inherent features of the speculative process Many recent studies have rejected the hypothesis of constant ex ante returns in a variety of different speculative markets.There is evidence that stock returns for the United States are weakly serially correlated,that dividend yields have predictive power for returns,that the slope of the yield curve predicts long-term bond returns,that interest rate spreads predict excess returns in the foreign exchange market,and more controversially,that asset markets display excess volatility.Research attempting to explain these findings has either challenged the statistical basis of rejections of the constant required return model, or sought to explain varying risk premia with changing risk factors. An alternative view is that variations in ex ante returns and asset market volatility arise primarily from what we have elsewhere labelled"speculative dynamics"-interac- tions between different types of traders,some of whom are not rational in the conventional sense of trading on the basis of all publicly available information.Distinguishing conclus- ively between the speculative dynamics view and the conventional view of asset market fluctuations is inherently very difficult,given the limited amount of data on asset returns and the difficulty of satisfactorily proxying for risk factors. This paper extends our research on speculative dynamics by introducing a larger and more diverse data set on speculative returns than has previously been analyzed. These data suggest four regularities in asset returns.First,asset returns are positively serially correlated at high frequencies.Second,returns are negatively serially correlated at lower frequencies.Third,there is a tendency toward"fundamental reversion"in asset prices.Finally,when short-term interest rates are high,the excess returns on other assets are low.Not all of these patterns emerge in all markets,but each appears in many different markets.Since risk factors might be expected to operate quite differently in different markets,we tentatively interpret the common patterns as evidence in favour of theories emphasizing speculative dynamics. 529 Copyright O 2001 All Rights Reserved