Rumors Revisited

In this paper, I identify and correct a set of problematic predictions in the existing theoretical literature on asset pricing with rumors. For example, unlike what is argued in the literature, I show that informative rumors are not profitable for all asset value distributions. Further, that for any asset value distribution and any positive round-trip transaction cost, informative rumors are not profitable if the rumormonger is an infrequently informed bluffer. Thus, an additional contribution of this paper is to illustrate conditions under which traders lack motivation for spreading informative rumors. This has implications for empirical testing and market surveillance