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Bubbles and persuasion with uncertainty over market sentiment

Sara Negrelli

Games and Economic Behavior, 2020, vol. 120, issue C, 67-85

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.

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)
Date: 2020
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DOI: 10.1016/j.geb.2019.12.007

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