Rumors in Financial Markets provides a fresh insight to the topic, combining the theory of Behavioral Finance with that of Experimental Finance a new and innovative scientific method which observes real decision makers in a controlled, clearly structured environment. Using the results from surveys and experiments, the author argues that rumors in the context of financial markets are built on three cornerstones: Finance, Psychology and Sociology. The book provides insights into how rumors evolve, spread and are traded on and provides explanations as to why volatility rockets, strong price movements, herding behavior for example, occur for apparently no good reason.
1.1 Objectives of this book.
1.2 Structure of this book.
1.3 Research methodology.
2 Definitions and Characteristics of Rumors.
2.2 Historical background to studies on rumors.
3 Rumors and the Theory of Finance.
3.1 Rumors and Behavioral Finance.
3.2 Rumors and rational behavior.
3.3 Empirical studies of rumors in the stock market.
3.4 Review of models on rumors.
3.5 Ethnographical studies.
4 Legal Aspects of Rumors in Financial Markets.
4.1 Rumors in financial markets and insider trading.
4.2 Review of models on insider trading.
4.3 Rumors in financial markets and price manipulation.
4.4 Review of models on market manipulation.
5 Survey of Rumors in Financial Markets.
5.1 The survey and its intention.
5.2 Participant profile.
5.3 Development of rumors.
5.4 Spreading of rumors.
5.5 Belief in rumors.
5.6 Network formation.
5.7 Trading on rumors.
5.8 Rumors versus information.
5.9 Conclusions from the survey.
6 Rumor Experiments.
6.1 Why use experiments as a research methodology?
6.2 Methodological pre–considerations.
6.3 Review of previous rumor experiments.
6.4 First stage experiments: Ambiguity aversion in a financial market.
6.5 Second stage experiments: Varying rumor messages.
6.6 Third stage experiments: Testing herd behavior.
6.7 Fourth stage experiments: Communication.
7 Conclusions and Outlook.
Appendix I.1: Formal presentation of preference relations and choice rules.
Appendix I.2: Formal presentation of preference relations with utility functions.
Appendix II.1: Experimental instructions for the rumor setting with an auctioneer (experiments 1 and 2).
Appendix II.2: Experimental instructions for the rumor setting with a batch auction (experiments 3 and 4).
Appendix II.3: Experimental instructions for the rumor setting in a continuous double auction (experiments 5 to 12).
Appendix III.1: Second stage experimental instructions.
Appendix IV.1: Third stage experimental instructions.
Appendix V.1: Fourth stage experimental instructions.
Appendix V.2: First two message levels.