Beyond Connectivity: Stock Market Participation in a Network

50 Pages Posted: 18 Mar 2024

See all articles by Olga Balakina

Olga Balakina

Leibniz Institute for Financial Research SAFE

Claes Bäckman

Leibniz Institute for Financial Research SAFE

Anastasia Parakhonyak

Durham University Business School

Date Written: March 18, 2024

Abstract

What are the aggregate and distributional consequences of the relationship be-tween an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents help spread information, there is a pivotal role for factors that determine sorting among agents. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. A higher degree of sorting benefits richer agents by creating clusters where information spreads more efficiently. We show empirical evidence consistent with the importance of connectivity and sorting. We discuss several new avenues for future research into the aggregate impact of peer effects in finance.

Keywords: ocial networks; Peer effects; Stock Market Participation; Connectivity; Homophily

Suggested Citation

Balakina, Olga and Bäckman, Claes and Parakhonyak, Anastasia, Beyond Connectivity: Stock Market Participation in a Network (March 18, 2024). SAFE Working Paper No. 416, Available at SSRN: https://ssrn.com/abstract=4763145 or http://dx.doi.org/10.2139/ssrn.4763145

Olga Balakina (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claes Bäckman

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Anastasia Parakhonyak

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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