The impacts of investor network and herd behavior on market stability: Social learning, network structure, and heterogeneity

Qingbin Gong and Xundi Diao

European Journal of Operational Research, 2023, vol. 306, issue 3, 1388-1398

Abstract: The networked structure of investor relationship has been documented by many researches. This paper proposes a dynamic model based on investor network, and investigate the impacts of investor interactions on market stability. Two learning patterns are taken into account. The herd behavior is characterized with the imitation and diffusion of trading strategies in investor network. The behavioral equilibria and their stability conditions are studied with mathematical analysis. As the findings show, herd behavior can affect trader structure as well as market stability. Although it is a potential source of bubbles, there exist some cases where herd behavior is beneficial to market stability. The impacts of network structure are closely related with the imitation mechanism. If investors mainly care about the absolute number of neighbors who adopt different strategies, the network effect could weaken market stability. To guarantee the stability conditions, the variance of degree distribution should fit with other parameters. A high variance of degree distribution might lead to market instability.

Keywords: Finance; Investor network; Herd behavior; Stability analysis; Heterogeneous agents (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221722005690
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:306:y:2023:i:3:p:1388-1398

DOI: 10.1016/j.ejor.2022.07.016

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().