Bubbles and Persuasion with Second Order Uncertainty

Sara Negrelli

No 1876, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Recent empirical studies suggest that, during times of unexpected innovation, agents heterogeneously update their beliefs about an asset fundamental value, and they are uncertain about other agents’ beliefs on it. In this paper I show that, when there is uncertainty about the market sentiment, defined as other investors’ beliefs over 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 becomes a severe concern with the recent diffusion of big data on agents’ beliefs, as it could strengthen existing financial bubbles, or even give rise to new ones.spect to anonymity; at the same time, the probability of the CBDC introduction increases if a return can be paid on it, and/or its implementation can guarantee at least the counterparty anonymity.

Keywords: Bubbles; Heterogenous Priors; Higher-Order Beliefs; Market Manipulation; Bayesian Persuasion (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 D84 G14 G24 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018
New Economics Papers: this item is included in nep-mic and nep-pay
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