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(Mis)information diffusion and the financial market

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  • Di Francesco, Tommaso
  • Torren-Peraire, Daniel

Abstract

This paper investigates the interplay between information diffusion in social networks and its impact on financial markets with an Agent-Based Model (ABM). Agents receive and exchange information about an observable stochastic component of the dividend process of a risky asset à la Grossman and Stiglitz (1980). A small proportion of the network has access to a private signal about the component, which can be clean (information) or distorted (misinformation). Other agents are uninformed and can receive information only from their peers. All agents are Bayesian, adjusting their beliefs according to the confidence they have in the source of information. We examine, by means of simulations, how information diffuses in the network and provide a framework to account for delayed absorption of shocks, that are not immediately priced as predicted by classical financial models. We investigate the effect of the network topology on the resulting asset price and evaluate under which condition misinformation diffusion can make the market more inefficient.

Suggested Citation

  • Di Francesco, Tommaso & Torren-Peraire, Daniel, 2025. "(Mis)information diffusion and the financial market," Journal of Economic Behavior & Organization, Elsevier, vol. 238(C).
    • Handle: RePEc:eee:jeborg:v:238:y:2025:i:c:s0167268125003300
    DOI: 10.1016/j.jebo.2025.107211
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    Keywords

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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