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Manipulating market sentiment

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  • Piccione, Michele
  • Spiegler, Ran

Abstract

We analyze a simple model of an asset market, in which a large rational trader interacts with “noise speculators” who seek short-run speculative gains, and become active following a prolonged episode of mispricing relative to the asset’s fundamental value. The model gives rise to price patterns such as bubble dynamics, positive short-run correlation and vanishing long-run correlation of price deviations from the fundamental value. We argue that this example model sheds light on the question as to whether rational speculators abet or curb price fluctuations.

Suggested Citation

  • Piccione, Michele & Spiegler, Ran, 2014. "Manipulating market sentiment," Economics Letters, Elsevier, vol. 122(2), pages 370-373.
    • Handle: RePEc:eee:ecolet:v:122:y:2014:i:2:p:370-373
    DOI: 10.1016/j.econlet.2013.12.021
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    References listed on IDEAS

    as
    1. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-952, October.
    3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    4. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-529.
    5. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    6. Ariel Rubinstein & Ran Spiegler, 2008. "Money Pumps in the Market," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 237-253, March.
    7. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    9. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 91(4), pages 579-597.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Pedro Manuel Nogueira Reis & Carlos Pinho, 2021. "A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(4), pages 420-442, October.
    2. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.
    3. Reis, Pedro Manuel Nogueira & Pinho, Carlos, 2020. "A new European investor sentiment index (EURsent) and its return and volatility predictability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).

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    More about this item

    Keywords

    Behavioral finance; Price manipulation; Bounded rationality; Trading rules; Speculative trade;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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