Social Interaction, Stochastic Volatility, and Momentum
43 Pages Posted: 17 Feb 2017 Last revised: 9 Jun 2021
Date Written: April 19, 2021
This paper incorporates information uncertainty and social interaction among investors into a random utility framework and develops an evolutionary equilibrium model of asset pricing and investor choice dynamics. We show that strong social interaction can lead to endogenous switching between two persistent regimes for the mean choice and return volatility, which can simultaneously generate time-series momentum and volatility clustering in asset returns. By using StockTwits post volume as a proxy for social interaction, we provide empirical evidence for the model predictions for various equity indices.
Keywords: Social interaction, mean choice, volatility clustering, time-series momentum
JEL Classification: G02, G12, G14
Suggested Citation: Suggested Citation