What Determines Word-of-Mouth Effects in Financial Markets?

45 Pages Posted: 1 Oct 2016

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Date Written: October 22, 2019

Abstract

We study what determines the strength of word-of-mouth effects in financial markets. We identify a set of events that – for plausibly exogenous reasons – changes the information set for certain investors and causes such “treated investors” to trade. We infer the strength of word-of-mouth effects from the degree to which abnormal trading activity spills over from the treated investors to their neighbors and their neighbors’ neighbors. Our results suggest that word-of-mouth effects are strongest when financial markets are relatively calm, when investor sentiment is high, when there are few extraneous news events, when the information transmitted through word-of-mouth is positive and when the investors communicating with one another have similar backgrounds.

Keywords: Social Interaction, Investor Communication, Information Diffusion

JEL Classification: G11, G12, G14, G20

Suggested Citation

Huang, Shiyang and Hwang, Byoung-Hyoun and Lou, Dong, What Determines Word-of-Mouth Effects in Financial Markets? (October 22, 2019). 7th Miami Behavioral Finance Conference 2016. Available at SSRN: https://ssrn.com/abstract=2845843 or http://dx.doi.org/10.2139/ssrn.2845843

Shiyang Huang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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

Korea University - Department of Finance

Seoul, 136-701
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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