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Hype and Dump Manipulation


  • Nevzat Eren


  • Han N. Ozsoylev



This paper introduces signaling in a standard market microstructure model so as to explore the economic circumstances under which hype and dump manipulation can be an equilibrium outcome. We consider a discrete time, multi-period model with stages of signaling and asset trading. A single informed trader contemplates whether or not to spread a (possibly dishonest) rumor on the asset payoff among uninformed traders. Dishonest rumor-mongering is costly due to regulatory enforcement, and the uninformed traders who access the rumor can be sophisticated or naive. The sophisticated traders correctly anticipate the relationship between the rumor and the asset payoff, whereas the naive ones take the rumor at its face value as if it truthfully reveals the asset payoff. The presence of sophisticated traders puts the informed trader off from rumor-mongering, because sophisticates fully infer the asset payoff from the rumor, reducing the informational rents enjoyed by the informed trader. Nevertheless we show that it can be optimal for an informed trader to create false hype among uninformed traders provided that there is at least one naive trader in the market and the cost of dishonest rumor-mongering is not too low. The false hype allows the informed trader to sell at an inflated price or buy at a deflated one. Intense regulatory enforcement, which makes dishonest rumor-mongering very costly, may not necessarily curb hype and dump schemes. Market depth and trading volume rise with “hype and dump†while market efficiency decreases.

Suggested Citation

  • Nevzat Eren & Han N. Ozsoylev, 2008. "Hype and Dump Manipulation," OFRC Working Papers Series 2008fe08, Oxford Financial Research Centre.
  • Handle: RePEc:sbs:wpsefe:2008fe08

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    References listed on IDEAS

    1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 1-37.
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    3. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
    4. Oren Bar-Gill & Michal Barzuza & Lucian Bebchuk, 2006. "The Market for Corporate Law," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 134-160, March.
    5. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
    6. Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
    7. Romano, Roberta, 1985. "Law as a Product: Some Pieces of the Incorporation Puzzle," Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(2), pages 225-283, Fall.
    8. Kahan, Marcel & Kamar, Ehud, 2002. "The Myth of State Competition in Corporate Law," Berkeley Olin Program in Law & Economics, Working Paper Series qt3xq7p9xw, Berkeley Olin Program in Law & Economics.
    9. Guhan Subramanian, 2004. "The Disappearing Delaware Effect," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 32-59, April.
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    Cited by:

    1. Tālis J. Putniņš, 2012. "Market Manipulation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 952-967, December.

    More about this item


    G11; G14;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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