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Rumours and markets. (English) Zbl 1135.91386

Summary: The paper presents a simple model to study the effects of rumours on markets. Agents in our economy communicate with their local neighbours which gives rise to the possible spread of a rumour. As the rumour affects beliefs of the agents the evolution of the rumour has a direct impact on market outcomes. Our results show that if the rumour dies out long-run equilibrium prices correspond to pre-rumour values. However, if the rumour stays present it produces a price run-up for the good that is positively targeted by the rumour. Price run-ups related to rumours have been observed in empirical studies by A. M. Rose [Rumor in the stock market. Public Opinion Quarterly 15, 461–486 (1951)], J. Pound and R. Zeckhauser [Clearly heard on the street: the effect of takeover rumors on stock prices. Journal of Business 63, 291–308 (1990)] and T. Zivney, W.J. Bertin and K. M. Torabzadeh [Overreaction to take-over speculation. Quarterly Review of Economics and Finance 36, 89–115 (1996)]. The present model provides an analytical foundation for this finding.

MSC:

91B54 Special types of economic markets (including Cournot, Bertrand)
91D30 Social networks; opinion dynamics
91B26 Auctions, bargaining, bidding and selling, and other market models
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