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An agent-based model of rumor-induced volatility in financial markets

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  • Marisetty, Vijaya B.
  • van Heeswijk, Wouter
  • Narayanan, Archana

Abstract

Rumors in financial markets impact investors’ decisions, driving asset prices away from their fundamental valuations. From a regulatory perspective, it is challenging to contain such rumors. We develop an agent-based model to understand the price discovery process in a simulated stock market that allows heterogeneous agents, who differ in financial literacy and cognitive ability to interact for price formation. We show that both financial literacy and cognitive ability are important determinants of rumor spread in stock markets: Higher (lower) cognitive ability and higher (lower) financial literacy reduce (increase) rumor spread. Our results suggest that both the prevalence and intensity of financial literacy play a significant role in reducing rumor induced volatility and promoting market stability.

Suggested Citation

  • Marisetty, Vijaya B. & van Heeswijk, Wouter & Narayanan, Archana, 2026. "An agent-based model of rumor-induced volatility in financial markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:beexfi:v:49:y:2026:i:c:s2214635025001169
    DOI: 10.1016/j.jbef.2025.101135
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