Networks, beliefs, and asset prices
Networks, beliefs, and asset prices
We set out a model of the stock market in which investors with heterogeneous beliefs update their type based on the past performance of neighbours in an arbitrary social network.
We study how the network structure and the degree of agents’ attention to performance affect the coupled price-type dynamics. Types converge to a group-consensus characterised by network centrality if updating is purely social and to either the group’s most fundamental or most chartist type if updating is purely performance-based, with the time to convergence being finite and proportional to the network diameter. For intermediate cases, we identify two key mechanisms which can make group-consensus non-monotonic with respect to investors’
attention to performance. These results shed light on when performance-based updating from social networks is stabilising – or destabilising – for asset prices. As an application, our
model can explain price bubbles and price oscillations by network-performance effects.
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hellmann, Tim
e03b4edd-3010-4f6d-831e-86e4b3d6cbe0
24 March 2022
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hellmann, Tim
e03b4edd-3010-4f6d-831e-86e4b3d6cbe0
Record type:
Monograph
(Working Paper)
Abstract
We set out a model of the stock market in which investors with heterogeneous beliefs update their type based on the past performance of neighbours in an arbitrary social network.
We study how the network structure and the degree of agents’ attention to performance affect the coupled price-type dynamics. Types converge to a group-consensus characterised by network centrality if updating is purely social and to either the group’s most fundamental or most chartist type if updating is purely performance-based, with the time to convergence being finite and proportional to the network diameter. For intermediate cases, we identify two key mechanisms which can make group-consensus non-monotonic with respect to investors’
attention to performance. These results shed light on when performance-based updating from social networks is stabilising – or destabilising – for asset prices. As an application, our
model can explain price bubbles and price oscillations by network-performance effects.
Text
SSRN-id4037357
- Accepted Manuscript
More information
Submitted date: 2022
e-pub ahead of print date: 24 March 2022
Published date: 24 March 2022
Identifiers
Local EPrints ID: 467638
URI: http://eprints.soton.ac.uk/id/eprint/467638
PURE UUID: 46b7847c-14cc-4ad2-85a1-a037de08b05e
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Date deposited: 18 Jul 2022 17:39
Last modified: 17 Mar 2024 07:22
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