Networks, beliefs, and asset prices
Networks, beliefs, and asset prices
We set out a novel social communication model of asset prices. An investor's type – which depends on their network and investment performance – determines their price beliefs. We show how properties of the network such as network centrality and diameter influence the price dynamics, convergence speed, and limiting belief types. For the polar cases of no attention to performance and exclusive attention to performance, we obtain analytically tractable results relating price and belief types to properties of the network, while for intermediate attention to performance we rely on numerical results. As applications, our model can explain price bubbles and price oscillations by network-performance effects, and we also study how price and type dynamics depend on connectedness on a small-world network. Our results shed light on when performance-based updating of beliefs on social networks is stabilising – or destabilising – for asset prices. A key finding is that the impact of network structure on asset prices and beliefs depends on how much attention investors pay to performance.
Asset pricing, Heterogeneous beliefs, Opinion dynamics, Social networks
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hellmann, Tim
e03b4edd-3010-4f6d-831e-86e4b3d6cbe0
1 April 2025
Hatcher, Michael
e0846252-6d46-44f8-ba3c-05cf1fba64ab
Hellmann, Tim
e03b4edd-3010-4f6d-831e-86e4b3d6cbe0
Hatcher, Michael and Hellmann, Tim
(2025)
Networks, beliefs, and asset prices.
Journal of Economic Dynamics and Control, 173, [105059].
(doi:10.1016/j.jedc.2025.105059).
Abstract
We set out a novel social communication model of asset prices. An investor's type – which depends on their network and investment performance – determines their price beliefs. We show how properties of the network such as network centrality and diameter influence the price dynamics, convergence speed, and limiting belief types. For the polar cases of no attention to performance and exclusive attention to performance, we obtain analytically tractable results relating price and belief types to properties of the network, while for intermediate attention to performance we rely on numerical results. As applications, our model can explain price bubbles and price oscillations by network-performance effects, and we also study how price and type dynamics depend on connectedness on a small-world network. Our results shed light on when performance-based updating of beliefs on social networks is stabilising – or destabilising – for asset prices. A key finding is that the impact of network structure on asset prices and beliefs depends on how much attention investors pay to performance.
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Accepted/In Press date: 27 January 2025
e-pub ahead of print date: 4 February 2025
Published date: 1 April 2025
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Publisher Copyright:
© 2025 The Author(s)
Keywords:
Asset pricing, Heterogeneous beliefs, Opinion dynamics, Social networks
Identifiers
Local EPrints ID: 498769
URI: http://eprints.soton.ac.uk/id/eprint/498769
ISSN: 0165-1889
PURE UUID: fc03a6e4-572f-41ea-81c2-7a922988b4f3
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Date deposited: 27 Feb 2025 18:21
Last modified: 22 Aug 2025 02:11
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