Does Speculation tend to Stabilize Prices?

Ed discussed speculating activities in his blog. I didn't read his paper on speculation (as I don't have the full access to it) , so I cannot comment on its conclusion "禁止摩貨勢必令市價波動幅度增加".

The paper's conclusion may be correct (and its validity is not this post's subject). But, theoretically, speculation does not necessarily tend to stabilize prices! It usually does when we use the term "speculation" for what is "arbitrage" (over time, or across different participating parties, or a mix of both). The problem is that speculation can be postulated, in addition to arbitrage, as buying when the price path is rising and selling when it is falling, in which case price volatility increases.

I suggest the following to interested readers:-

1. section 6.2 of J. Hirshleifer and J. Riley's "The Analytics of Uncertainty and Information"
2. Baumol, W., "Speculation, Profitability, and Stability," Review of Economics and Statistics, 30 (August 1957)
3. Friedman, M., "In Defense of Destabilizing Speculation," reprinted in Friedman, M. The Optimum Quantity of Money and Other Essays.