Social interaction, volatility clustering, and momentum

Xuezhong (Tony) He, Kai Li, Caterina Santi and Lei Shi

Journal of Economic Behavior & Organization, 2022, vol. 203, issue C, 125-149

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.

Keywords: Social interaction; Mean choice; Volatility clustering; Time-series momentum; Excess volatility (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:203:y:2022:i:c:p:125-149

DOI: 10.1016/j.jebo.2022.05.029

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