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Thought Viruses and Asset Prices

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  • Wolfgang Kuhle

Abstract

We use insights from epidemiology, namely the SIR model, to study how agents infect each other with "investment ideas." Once an investment idea "goes viral," equilibrium prices exhibit the typical "fever peak," which is characteristic for speculative excesses. Using our model, we identify a time line of symptoms that indicate whether a boom is in its early or later stages. Regarding the market's top, we find that prices start to decline while the number of infected agents, who buy the asset, is still rising. Moreover, the presence of fully rational agents (i) accelerates booms (ii) lowers peak prices and (iii) produces broad, drawn-out, market tops.

Suggested Citation

  • Wolfgang Kuhle, 2018. "Thought Viruses and Asset Prices," Papers 1812.11417, arXiv.org.
    • Handle: RePEc:arx:papers:1812.11417
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    File URL: http://arxiv.org/pdf/1812.11417
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    References listed on IDEAS

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    1. Shive, Sophie, 2010. "An Epidemic Model of Investor Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(1), pages 169-198, February.
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    3. Jeffrey R. Brown & Zoran Ivković & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    4. Robert J. Shiller, 2017. "Narrative Economics," American Economic Review, American Economic Association, vol. 107(4), pages 967-1004, April.
    5. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    7. repec:bla:jfinan:v:59:y:2004:i:1:p:137-163 is not listed on IDEAS
    8. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "Thy Neighbor's Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers," Journal of Finance, American Finance Association, vol. 60(6), pages 2801-2824, December.
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    Cited by:

    1. Ash, Elliott & Gauthier, Germain & Widmer, Philine, 2024. "Relatio: Text Semantics Capture Political and Economic Narratives," Political Analysis, Cambridge University Press, vol. 32(1), pages 115-132, January.

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