Media Effect and Stock Price Bubble
Posted: 6 Oct 2010
Date Written: October 4, 2010
The episode of financial crisis convulsed by the bankruptcy of Lehman Brothers was triggered by the prevailing unconfirmed rumors from CNBC. The “rumor come true” effect of capital market reflects the importance of investor beliefs. More importantly, it raises the dispute over media responsibility – whether exaggeration in media coverage would influence investors’ trading therefore financial assets pricing. This paper empirically analyzes media’s effects on capital market and finds that the media coverage would cause larger divergence of opinion among the traders and then create stock market bubbles. In addition, this paper, by analyzing the retail transactions through a microstructure research method, finds transaction form individual trader would amplify the bubbles effect of media. This paper makes it possible to investigate the influence of media coverage on transactions the time interval of which is subdivided through a specific empirical research method. This research will help to better understand the characteristics of the mechanisms of China market and price formation process as well as to improve the stock market efficiency.
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