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Asset pricing in large information networks

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Author Info

  • Ozsoylev, Han N.
  • Walden, Johan

Abstract

We study asset pricing in economies with large information networks. We focus on networks that are sparse and have power law degree distributions, in line with empirical studies of large scale social networks. Our theoretical framework yields a rich set of novel asset pricing implications. We derive closed form expressions for price, volatility, profitability and trading volume, as functions of the network topology. We also study agent welfare and show that the network that optimizes total welfare is typically a uniform one with an intermediate degree of connectedness.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 6 ()
Pages: 2252-2280

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Handle: RePEc:eee:jetheo:v:146:y:2011:i:6:p:2252-2280

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Information networks; Noisy rational expectations equilibrium; Power law;

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References

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Citations

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Cited by:
  1. Liberati, Caterina & Marzo, Massimiliano & Zagaglia, Paolo & Zappa, Paola, 2012. "Structural distortions in the Euro interbank market: the role of 'key players' during the recent market turmoil," MPRA Paper 40223, University Library of Munich, Germany.
  2. Garcia, Daniel, 2012. "Communication and Information Acquisition in Networks," MPRA Paper 55481, University Library of Munich, Germany, revised 24 Apr 2014.
  3. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
  4. Yuri Biondi & Simone Righi, 2013. "What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary," Papers 1312.7460, arXiv.org.
  5. Itay P. Fainmesser, 2012. "Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 4(1), pages 32-69, February.
  6. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  7. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.

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