Rumors in Financial Markets

40 Pages Posted: 23 Sep 2011

See all articles by Fan Chen

Fan Chen

University of Oklahoma - Michael F. Price College of Business - Division of Finance

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business

Lawrence Berger

New School for Social Research

Date Written: September 13, 2011

Abstract

This paper develops a dynamic model of asset price behavior based upon the arrival and diffusion of rumors in a securities market. The model is based upon a time-homogeneous pure birth process in which the number of informed and uninformed traders varies probabilistically over time as learning occurs. Traders become informed by observing the original source of information or through communication with an individual who has ‘heard’ the information already, both of which are probabilistic events. Price changes result from trades that occur when an individual hears and acts on the information. Rumors can contain true or false information.False rumors ultimately are corrected. Results from simulating the model yield log price changes -- similar to actual intraday common stock returns.

Keywords: Rumors; Information transmission

Suggested Citation

Chen, Fan and Linn, Scott C. and Berger, Lawrence, Rumors in Financial Markets (September 13, 2011). Available at SSRN: https://ssrn.com/abstract=1925767 or http://dx.doi.org/10.2139/ssrn.1925767

Fan Chen (Contact Author)

University of Oklahoma - Michael F. Price College of Business - Division of Finance ( email )

Norman, OK 73019
United States
4055689358 (Phone)

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business ( email )

3704 Windover Drive
Norman, OK 73072
United States
405-595-7426 (Phone)

Lawrence Berger

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

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