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

37 Pages Posted: 3 Aug 2023 Last revised: 10 Nov 2023

Date Written: November 9, 2023

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

Suggested Citation

Herzing, Tobias J. and Muck, Matthias, Can You Keep a Secret? The dissemination of false rumors and the evolution of bubbles in predatory trading games (November 9, 2023). Available at SSRN: https://ssrn.com/abstract=4526751 or http://dx.doi.org/10.2139/ssrn.4526751

Tobias J. Herzing

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg, 96045
Germany

Matthias Muck (Contact Author)

University of Bamberg ( email )

Kärntenstr. 7
Bamberg, 96052
Germany
+49-(0)951-860-2091 (Phone)

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