Article first published online: 15 JUL 2003
The Journal of Finance
Volume 58, Issue 4, pages 1499–1520, August 2003
How to Cite
Bommel, J. V. (2003), Rumors. The Journal of Finance, 58: 1499–1520. doi: 10.1111/1540-6261.00575
- Issue published online: 15 JUL 2003
- Article first published online: 15 JUL 2003
A Kyle (1985) model with private information diffusion is used to examine the motivation to spread stock tips. An informed investor with limited investment capacity spreads imprecise rumors to an audience of followers. Followers trade on the advice and move the price. Due to the imprecision of the rumor, the price overshoots with positive probability. This gives the rumormonger the opportunity to trade twice: First when she receives information, then when she knows the price to be overshooting. In equilibrium, rumors are informative and both rumormongers and followers increase their profits at the expense of uninformed liquidity traders.