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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 {\it A. M. Rose} [Rumor in the stock market. Public Opinion Quarterly 15, 461--486 (1951)], {\it J. Pound} and {\it R. Zeckhauser} [Clearly heard on the street: the effect of takeover rumors on stock prices. Journal of Business 63, 291--308 (1990)] and {\it T. Zivney, W.J. Bertin} and {\it 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.

91B54Special types of economies
91D30Social networks
91B26Market models (auctions, bargaining, bidding, selling, etc.)
Full Text: DOI
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