Chun Xia

(Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China)

 

 

Abstract: We develop an asset pricing model in which agents communicate information in social networks prior to trading. An agent who is more confident in her private information attaches a greater weight on her private signal than on a signal received from communication when transmitting her information. The model generates novel implications: First, proximity between agents in networks affects correlation of asset demands. Second, the impact of agents’ private information on asset prices depends on network structures. Third, irrespective of network structures, market liquidity, trading volume, price volatility and informational efficiency of prices are all higher with communication than without. Interestingly, information communication can alternatively explain some intriguing empirical facts which were attributed to overconfidence in the existing studies.

 

 

Key words: communication; confidence; overconfidence; circle network; star network

 

JEL codes: C90, D80, G10