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Hype and Dump Manipulation

Author

Listed:
  • Nevzat Eren
  • Han N. Ozsoylev

Abstract

This paper introduces signaling in a standard market microstructure model so as to explore the economic circumstances under which hype and dump manipulation can be an equilibrium outcome. We consider a discrete time, multi-period model with stages of signaling and asset trading. A single informed trader contemplates whether or not to spread a (possibly dishonest) rumor on the asset payoff among uninformed traders. Dishonest rumor-mongering is costly due to regulatory enforcement, and the uninformed traders who access the rumor can be sophisticated or naive. The sophisticated traders correctly anticipate the relationship between the rumor and the asset payoff, whereas the naive ones take the rumor at its face value as if it truthfully reveals the asset payoff. The presence of sophisticated traders puts the informed trader off from rumor-mongering, because sophisticates fully infer the asset payoff from the rumor, reducing the informational rents enjoyed by the informed trader. Nevertheless we show that it can be optimal for an informed trader to create false hype among uninformed traders provided that there is at least one naive trader in the market and the cost of dishonest rumor-mongering is not too low. The false hype allows the informed trader to sell at an inflated price or buy at a deflated one. Intense regulatory enforcement, which makes dishonest rumor-mongering very costly, may not necessarily curb hype and dump schemes. Market depth and trading volume rise with “hype and dump†while market efficiency decreases.

Suggested Citation

  • Nevzat Eren & Han N. Ozsoylev, 2008. "Hype and Dump Manipulation," OFRC Working Papers Series 2008fe08, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2008fe08
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2008fe08.pdf
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    Cited by:

    1. Tālis J. Putniņš, 2012. "Market Manipulation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 952-967, December.
    2. Chou, Hsin-I & Tian, Gloria Y. & Yin, Xiangkang, 2015. "Takeover rumors: Returns and pricing of rumored targets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 13-27.
    3. Zhang, Zhigang & Zhang, Qiang & Liu, Shancun & Wang, Jiarui, 2023. "How does an online influencer manipulate the stock market?," Finance Research Letters, Elsevier, vol. 58(PA).

    More about this item

    Keywords

    G11; G14;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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