Asset Prices with Communication through Social Networks

Abstract

Recent empirical studies suggest that social networks impact investors’ financial decisionmaking
process. Motivated by this evidence, we propose a rational expectations equilibrium
model of asset prices in which agents communicate and learn from each other according
to an exogenous social network. The model generates several novel implications
for finite-agent noisy rational expectations economies: (1) social influence affects asset
pricing, where one’s influence is determined by her connections in the social network;
(2) there is positive relationship between agents’ social proximity and their asset demand
correlation; (3) centralized social networks may account for the high volatility ratio of
price to fundamentals observed in stock markets.

Keywords: Asset pricing, rational expectations, social networks

JEL Classification: G12, G14