Social Interaction, Stochastic Volatility, and Momentum

43 Pages Posted: 17 Feb 2017 Last revised: 9 Jun 2021

See all articles by Xuezhong He

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Caterina Santi

HEC Liège

Lei Shi

Macquarie University; Financial Research Network (FIRN)

Date Written: April 19, 2021

Abstract

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

JEL Classification: G02, G12, G14

Suggested Citation

He, Xue-Zhong 'Tony' and Li, Kai and Santi, Caterina and Shi, Lei, Social Interaction, Stochastic Volatility, and Momentum (April 19, 2021). Available at SSRN: https://ssrn.com/abstract=2916490 or http://dx.doi.org/10.2139/ssrn.2916490

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Caterina Santi

HEC Liège ( email )

Rue Louvrex 14
Liège, 4000
Belgium

HOME PAGE: http://www.caterinasanti.com

Lei Shi

Macquarie University ( email )

New South Wales 2109
Australia
+612 98508478 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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