Abstract

http://ssrn.com/abstract=1569418
 
 

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An Epidemiological Approach to Opinion and Price-Volume Dynamics


Dong Hong


Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Andrei Ungureanu


Princeton University

January 3, 2011

AFA 2012 Chicago Meetings Paper

Abstract:     
We develop a simple and tractable model of opinions and price-volume dynamics based on a word-of-mouth communication process widely used in epidemiology. Risk-averse investors have different opinions depending on whether they heard the news from a friend. Opinions initially diverge and then converge over time as news spreads, which leads to price adjustment and trading volume. News released to many leads to an expected difusion rate (the change in the fraction of investors with the news) that declines with time. But news initially released to few leads to an expected diffusion rate that initially increases in time and only then decreases. The serial correlation of stock returns and trading volume are proportional to the diffusion rate. The term structure of the serial correlation of non-overlapping returns can be declining or hump-shaped in time depending on whether the news was widely released. We test and verify these predictions and show that this model is useful for understanding news and price momentum and the dynamics of investor and analyst expectations around media events.

Number of Pages in PDF File: 50

Keywords: Word of Mouth, Information Diffusion, Public News, Private News

JEL Classification: G10, G12, G14

working papers series





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Date posted: March 13, 2010 ; Last revised: November 13, 2013

Suggested Citation

Hong, Dong and Hong, Harrison G. and Ungureanu, Andrei, An Epidemiological Approach to Opinion and Price-Volume Dynamics (January 3, 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1569418 or http://dx.doi.org/10.2139/ssrn.1569418

Contact Information

Dong Hong
Singapore Management University ( email )
50 Stamford Rd.
Singapore, 178899
Singapore
Singapore Management University - Lee Kong Chian School of Business ( email )
469 Bukit Timah Road
Singapore 912409
Singapore

Harrison G. Hong (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andrei Ungureanu
Princeton University ( email )
22 Chambers Street
Princeton, NJ 08544
United States
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