Game On: Social Networks and Markets
54 Pages Posted: 1 Mar 2021 Last revised: 1 Jun 2022
Date Written: February 28, 2021
I present closed-form solutions for prices, portfolios, and beliefs in a model where four types of investors trade assets over time: naive investors who learn via a social network, ``fanatics'' possibly spreading fake news, and rational short- and long-term investors. I show that fanatic and rational views dominate over time, and their relative importance depends on their following by influencers. Securities markets exhibit social network spillovers, large effects of influencers and thought leaders, bubbles, bursts of high volume, price momentum, fundamental momentum, and reversal. The model sheds new light on the GameStop event, historical bubbles, and asset markets more generally.
Keywords: Echo chambers, networks, influencers, fake news, social media, bubbles, asset prices, belief formation
JEL Classification: D85, D91, G12, G14, G4, G5, L14
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