Events

Author:

• Chun XIA
  University of Minnesota

A growing empirical literature documents that social communication affects individual trading behavior and market trading patterns in financial markets. Motivated by this evidence, I develop an asset pricing model à la Kyle (1985) in which agents communicate information in social networks prior to trading. In particular, an agent who is more confident in her private information puts greater weight on her private signal than on signal received through communication when aggregating her information. The model generates several novel implications. First, proximity between agents in networks affects correlation of agent demands. Second, individual agent exploits information and influences price distinctly in different networks. The associated behavior enriches some influential thinking about speculation in financial markets such as "beauty contest". Third, under certain circumstances social communication is welfare improving for all agents. Fourth, irrespective of different network structures, market trading patterns such as market liquidity, trading volume, price volatility and informational efficiency of prices are all higher in the presence of social communication relative to those in economy where agents exploit private signals exclusively. Finally, market trading patterns are strictly decreasing in (a range of) agents' confidence in private signals. Interestingly, social communication can alternatively explain some intriguing empirical facts such as "gender trading differences" which were attributed to overconfidence. These findings have not been previously reported in the literature.