Information Flow, Social Interactions and the Fluctuations of Prices in Financial Markets
We model how excess demand or excess supply can be generated in the presence of a social network of interactions, where agents are subject to external information and individual incentives. In this context we study price fluctuations in financial markets under equilibrium. In particular, we isolate the role of these different factors in the determination of price fluctuations and describe non trivial sensitivities to changes in equilibrium due to the existence of social interactions. We characterize equilibrium and distinguish between stable and unstable equilibrium. Crashes or bubbles are seen as out-of-equilibrium situations, preceeded by unstable equilibrium. Fluctuations under unstable equilibrium are shown to be abnormal and particulary large. Also, we show how fluctuations of the external information flows affect the fluctuations of the return process. In all cases we explain the well-known phenomena that prices do not fluctuate upwards in the same way as they fluctuate downwards. This asymmetry of price fluctuations is due to asymmetries in the price elasticity of demand and supply curves at the level defining equilibrium
|Date of creation:||11 Aug 2004|
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- William A. Brock, 1993.
"Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance,"
El Colegio de México, Centro de Estudios Económicos, vol. 8(1), pages 3-55.
- W. A. Brock, 1993. "Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance," Working Papers 93-02-006, Santa Fe Institute.
- William A. Brock & Steven N. Durlauf, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 235-260.
- Brock,W.A. & Durlauf,S.N., 2000. "Discrete choice with social interactions," Working papers 7, Wisconsin Madison - Social Systems.
- Blume Lawrence E., 1993. "The Statistical Mechanics of Strategic Interaction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 387-424, July.
- L. Blume, 2010. "The Statistical Mechanics of Strategic Interaction," Levine's Working Paper Archive 488, David K. Levine.
- William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
- Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
- Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
- Durlauf, Steven N, 1996. "A Theory of Persistent Income Inequality," Journal of Economic Growth, Springer, vol. 1(1), pages 75-93, March.
- Steven N. Durlauf, 1992. "A Theory of Persistent Income Inequality," NBER Working Papers 4056, National Bureau of Economic Research, Inc.
- Durlauf, S.N., 1992. "A Theory of Persistent Income Inequality," Papers 47, Stanford - Institute for Thoretical Economics.
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