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Market Manipulation and Suspicious Stock Recommendations on Social Media

41 Pages Posted: 31 Jul 2017 Last revised: 1 Aug 2017

Thomas Renault

Université Paris I Panthéon-Sorbonne - Laboratoire PRISM; Catholic University of Lille - IESEG School of Management

Date Written: August 1, 2017

Abstract

Social media can help investors gather and share information about stock markets. However, it also presents opportunities for fraudsters to spread false or misleading statements in the marketplace. Analyzing millions of messages sent on the social media platform Twitter about small capitalization firms, we find that an abnormally high message activity on social media is associated with a large price increase on the event day and followed by a sharp price reversal over the next week. Our findings are consistent with the patterns of a pump-and-dump scheme, where fraudsters use social media to temporarily inflate the price of small capitalization stocks. To differentiate between the effects of overoptimism by noise traders and the illegal gains of a pump-and-dump scheme, we investigate social interactions between Twitter users through the use of network theory. We identify several clusters of users with suspicious online activity (stock promoters, fake accounts, automatic postings), favoring the manipulation/promotion hypothesis over the behavioral hypothesis.

Keywords: Asset Pricing, Market Manipulation, Social Media, Twitter

JEL Classification: C18, D80, G12, G14

Suggested Citation

Renault, Thomas, Market Manipulation and Suspicious Stock Recommendations on Social Media (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=3010850

Thomas Renault (Contact Author)

Université Paris I Panthéon-Sorbonne - Laboratoire PRISM ( email )

17 rue de la Sorbonne
Paris, 75005
France

Catholic University of Lille - IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

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