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Facebook for Finance: Why do Investors Share Ideas via Their Social Networks?

35 Pages Posted: 23 Nov 2008 Last revised: 2 Mar 2011

Wesley R. Gray

Alpha Architect; Drexel University - LeBow College of Business

Date Written: November 2, 2010

Abstract

Empirical evidence suggests that investors share price-relevant information via their social networks. I analyze why and under what circumstances skilled investors (“arbitrageurs”) will rationally share private information via this word-of-mouth mechanism. My “diversification” sharing model suggests that capital constrained arbitrageurs will share ideas to gain access to new ideas and lower their portfolio volatility. My “awareness” sharing model suggests that arbitrageurs share their private information to attract additional capital into their asset market. My models make multiple hypotheses about when, where, and how arbitrageurs will rationally share information via their social networks - many of these predictions are observed empirically.

Keywords: arbitrage, hedge funds, market efficiency, information exchange, social networks, loss aversion, crowded trades, Facebook

JEL Classification: G10, G11, G12, G14, G18, G23

Suggested Citation

Gray, Wesley R., Facebook for Finance: Why do Investors Share Ideas via Their Social Networks? (November 2, 2010). Available at SSRN: https://ssrn.com/abstract=1304271 or http://dx.doi.org/10.2139/ssrn.1304271

Wesley R. Gray (Contact Author)

Alpha Architect ( email )

213 Foxcroft Road
Broomall, PA 19008
United States
7732304727 (Phone)

HOME PAGE: http://www.alphaarchitect.com

Drexel University - LeBow College of Business ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

HOME PAGE: http://www.lebow.drexel.edu/corporate-services/corporate-and-executive-education/executive-faculty

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