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Social interaction, volatility clustering, and momentum

Author

Listed:
  • He, Xue-Zhong
  • Li, Kai
  • Santi, Caterina
  • Shi, Lei

Abstract

This paper incorporates information uncertainty and social interaction among investors into a random utility framework and develops a dynamic equilibrium model of asset pricing and investor choice. We show that strong social interaction can lead to endogenous switching between two persistent regimes for the mean choice fraction of investor population, which can simultaneously generate volatility clustering and time-series momentum 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.

Suggested Citation

  • He, Xue-Zhong & Li, Kai & Santi, Caterina & Shi, Lei, 2022. "Social interaction, volatility clustering, and momentum," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 125-149.
    • Handle: RePEc:eee:jeborg:v:203:y:2022:i:c:p:125-149
    DOI: 10.1016/j.jebo.2022.05.029
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    More about this item

    Keywords

    Social interaction; Mean choice; Volatility clustering; Time-series momentum; Excess volatility;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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