Abstract: The belief bias of the uninformed traders is introduced to the market manipulation model. With the framework of the competitive rational expectations equilibria, a risky asset pricing model with belief heterogeneity of uninformed traders is built. A linear price function in the unique Bayesian linear equilibrium is derived, by which the market manipulation by one powerful insider is studied and thus revealed. The results of the study show that the belief bias of the uninformed traders significantly influences the demands of the informed and uninformed traders, the equilibrium price of the risky asset and the manipulation strategy of the powerful insider. But it doesn't affect the depth of the market. The insider is assumed to be powerful enough to manipulate the price by designedly spreading false information to make the uninformed traders to trade by following the false information. The insider should take into account the belief bias of the unformed traders in order to maximize his profit when spreading false information. In the linear equilibrium, the equilibrium price has a positive linear correlation with the liquidation value expressed by the false information.

Key words: market manipulation, insider information, belief heterogeneity, belief bias, rational expectations equilibria