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|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Durlauf, Steven N, 1996.
"A Theory of Persistent Income Inequality,"
Journal of Economic Growth,
Springer, vol. 1(1), pages 75-93, March.
- L. Blume, 2010.
"The Statistical Mechanics of Strategic Interaction,"
Levine's Working Paper Archive
488, David K. Levine.
- Blume Lawrence E., 1993. "The Statistical Mechanics of Strategic Interaction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 387-424, July.
- Brock, W.A. & Hommes, C.H., 1996.
"A Rational Route to Randomness,"
9530r, Wisconsin Madison - Social Systems.
- W. A. Brock, 1993.
"Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance,"
93-02-006, Santa Fe Institute.
- William A. Brock, 1993. "Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(1), pages 3-55.
- Brock,W.A. & Durlauf,S.N., 2000.
"Discrete choice with social interactions,"
7, Wisconsin Madison - Social Systems.
When requesting a correction, please mention this item's handle: RePEc:ecm:latm04:114. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.