Bubbles and Persuasion with Second Order Uncertainty

45 Pages Posted: 14 May 2018 Last revised: 3 Aug 2018

Date Written: March 28, 2018

Abstract

Recent empirical studies suggest that, during times of unexpected innovation, agents heterogeneously update their beliefs about an asset fundamental value, and they are uncertain about other agents’ beliefs on it. In this paper I show that, when there is uncertainty about the market sentiment, defined as other investors’ beliefs over an asset fundamental value, market manipulation can act through a previously unconsidered channel, by misleading agents’ learning on the market sentiment. This novel type of market manipulation becomes a severe concern with the recent diffusion of big data on agents’ beliefs, as it could strengthen existing financial bubbles, or even give rise to new ones.

Keywords: Bubbles, Heterogeneous Priors, Higher-Order Beliefs, Market Manipulation

JEL Classification: C73, D82, D83, D84, G14, G24

Suggested Citation

Negrelli, Sara, Bubbles and Persuasion with Second Order Uncertainty (March 28, 2018). BAFFI CAREFIN Centre Research Paper No. 2018-76, Available at SSRN: https://ssrn.com/abstract=3178123 or http://dx.doi.org/10.2139/ssrn.3178123

Sara Negrelli (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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