Greed and Fear in Financial Markets: The Case of Stock Spam E-Mails

Abstract

Using a rich dataset of stock spam e-mails as a laboratory, we test and find support for three behavioral finance theories related to investor attention, ambiguity, and overweighting of low probability outcomes. First, we find that both the dollar volume and return on the peak day of the spam campaigns (SCs) are significantly higher compared to those on randomly selected non-spam dates. In addition, SCs reduce the number of zero trading days while the campaign is underway. Second, e-mails with a target price have significantly higher abnormal dollar volume and abnormal return on the peak day of the SC than e-mails without a target price. Thus, individual investors favor bets with unambiguous payoffs, which supports the ambiguity hypothesis. Finally, when the target price indicated in spam e-mails is about 53 times the current price, the abnormal return of the SC peaked at 31%. We document a nonlinear relationship between abnormal return on the peak day of the SCs and the premium implied in the spam e-mails. Although investors overweight low probability events, the overweighting decreases when the probability becomes out of reach. Our findings concerning target price are consistent with cumulative prospect theory.

Keywords:

• Stock spam
• Market manipulation
• Investor attention
• Prospect theory

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Corrigendum

ACKNOWLEDGMENTS

William Hu thanks College of Business at Arkansas State University for summer research support.

Notes

1. For details of the “Operation Spamalot”, visit the following two links: http://www.sec.gov/news/press/2007/2007-34.htm and http://www.sec.gov/news/speech/2007/spch030807mks.htm.

2. We thank Leonard Richardson from www.crummy.com for supplying the spam e-mail dataset.

3. We obtain similar results when we use the full sample.

4. An SC is defined as a period of spamming activity with no more than five consecutive days without a spam e-mail. PeakDay is the day within the SC with the maximum number of spam e-mails, taking the first such day for ties.