Can You Keep a Secret? The dissemination of false rumors and the evolution of bubbles in predatory trading games

Abstract

This research addresses the impact of fake rumors on the evolution of bubbles in stock prices in a predatory trading game. In line with intuition, we find that the development of these bubbles is significantly different from the formation and progression of bubbles based on true rumors. Particularly, the first increase in stock prices may be followed by a crash when the rumor is not true. More volatility is observed when there are many players or when there is a lot of pressure to act on the victim. In contrast, the dissemination of the rumor has a dampening effect on the inflation of the bubble when the rumor is true. Moreover, it is more difficult to detect false rumors from stock prices when there are many predators. This observation makes herding among predators a particular challenging problem for regulators and policymakers.

Keywords: Predatory Trading, Stock Market Bubbles, Rumors

JEL Classification: C73, C50, D8, D9