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Dynamic effects of social influence on asset prices

Author

Listed:
  • Jia-Ping Huang

    (Shenzhen University)

  • Yang Zhang

    (Shenzhen University)

  • Juanxi Wang

    (Oxford Brookes University
    University of Oxford)

Abstract

This paper examines the dynamic effects of Social Influence on asset prices in the presence of heterogeneous expectations among investors. In our model, the choices of investors’ trading strategies are influenced not only by past payoffs but also by their neighbors’ choices in the social network. To obtain tractable results with generic implications for social structure, we use a mean-field approximation approach rather than specifying the exact structure of social network. Analytical conditions for the existence and local stability of equilibria of price dynamics are established and validated through numerical simulations. Our analysis shows that social influence increases the dimension of the dynamical system and that equilibria can only be expressed implicitly as solutions of certain equations. We also investigate the long-run behavior of price and fraction of trading strategies using numerical simulation under a scale-free network and a power function type social influence factor. Our results suggest that the system tends to be stable when social influence is small but exhibit complex periodic orbits and even chaos when social influence is large. These findings yield valuable insights into the role of social influence in financial markets.

Suggested Citation

  • Jia-Ping Huang & Yang Zhang & Juanxi Wang, 2023. "Dynamic effects of social influence on asset prices," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 671-699, July.
    • Handle: RePEc:spr:jeicoo:v:18:y:2023:i:3:d:10.1007_s11403-023-00382-z
    DOI: 10.1007/s11403-023-00382-z
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    More about this item

    Keywords

    Social influence; Asset pricing dynamics; Heterogeneous expectation; Mean-field approximation; Agent-based model;
    All these keywords.

    JEL classification:

    • 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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