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Bubbles and persuasion with uncertainty over market sentiment

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  • Negrelli, Sara

Abstract

Recent empirical studies suggest that, during times of unexpected innovation, agents heterogeneously update their beliefs about an asset fundamental value and are uncertain of other agents' beliefs about it. In this paper I show that, when there is uncertainty over the market sentiment – defined as other investors' beliefs about 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 could strengthen existing financial bubbles, or even give rise to new ones.

Suggested Citation

  • Negrelli, Sara, 2020. "Bubbles and persuasion with uncertainty over market sentiment," Games and Economic Behavior, Elsevier, vol. 120(C), pages 67-85.
    • Handle: RePEc:eee:gamebe:v:120:y:2020:i:c:p:67-85
    DOI: 10.1016/j.geb.2019.12.007
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bubbles; Heterogenous priors; Higher-order beliefs; Market manipulation; Bayesian persuasion;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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