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Can Rumors and Other Uninformative Messages Cause Illiquidity ?

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Abstract
In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive a vague statement about the outcome of a past investment decision. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game and would present a threshold equilibrium. If not, in theory both an equilibrium where all invest and an equilibrium where no one invests can occur. In a Lab experiment, a large number of subjects adopt switching strategies consistent with the threshold equilibrium and appear to respond to the orientation of the message. Insights apply to contagion and market manipulation episodes.

Suggested Citation

  • Radu, Vranceanu & Besancenot, Damien & Dubart, Delphine, 2013. "Can Rumors and Other Uninformative Messages Cause Illiquidity ?," ESSEC Working Papers WP1309, ESSEC Research Center, ESSEC Business School, revised Jun 2014.
    • Handle: RePEc:ebg:essewp:dr-13009
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    More about this item

    Keywords

    Illiquidity; Rumors; Market panic; Global games; Strategic uncertainty; Experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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