Social finance: a model of social influence on financial markets

Abstract

The purpose of this research project is to investigate the possible destabilizing effects generated by social interactions between investors in financial markets, with particular regard to excess volatility in price fluctuations and financial bubbles. More specifically, I build a model describing a financial market populated by different categories of investors, distinguished by their level of sophistication, which measures investors’ net worth and experience in financial markets and having heterogeneous beliefs in estimating the value of the traded asset. I represent the interaction among traders through a coupled map, which describes the evolution and dissemination of the perceived value of the asset over time. Its esteem will depend on the trading strategy adopted by these investors, having the choice between being fundamentalists, that is, believing the asset will tend to its fundamental value, contrarian fundamentalists, believing the asset will move away from its fundamental value, or followers, imitating one of the two previous types of investors with a delay. My goal is to perform an analysis of this model and understand how the structure of this system and the set of investors affected by social biases influence those critical points beyond which these undesired phenomena appear.

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Identifiers

ORCID for Giuseppe Di Nardo: orcid.org/0000-0003-4259-3767

ORCID for Rebecca Hoyle: orcid.org/0000-0002-1645-1071

ORCID for Michael Hatcher: orcid.org/0000-0001-8506-1950

ORCID for Ruben Sanchez-Garcia: orcid.org/0000-0001-6479-3028

ORCID for Zudi Lu: orcid.org/0000-0003-0893-832X

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