Did Social Interactions Fuel or Suppress the US Housing Bubble?

30 Pages Posted: 5 Dec 2017 Last revised: 19 Jan 2018

Date Written: January 18, 2018

Abstract

We study the implications of social interactions for financial markets in which investors exhibit different degrees of sophistication and can influence each other's beliefs through their interaction. We show that social interactions can either increase or decrease the likelihood for a financial bubble, depending on whether unsophisticated or sophisticated investors have greater social influence. We also present empirical evidence consistent with the theoretical framework from the recent housing bubble. We find that sociability promotes more conservative demand for housing and more stable real estate prices, particularly when the number of sophisticated residents in an area is high.

Keywords: Contagion, Bubbles, Real Estate, Financial Literacy, Subprime Mortgages

JEL Classification: D1, G12, G21

Suggested Citation

Ko, Kwangmin and Pirinsky, Christo Angelov, Did Social Interactions Fuel or Suppress the US Housing Bubble? (January 18, 2018). Available at SSRN: https://ssrn.com/abstract=3079846 or http://dx.doi.org/10.2139/ssrn.3079846

Kwangmin Ko (Contact Author)

Upstart ( email )

2950 S Delaware St #300
San Mateo, CA 94403
United States
2022570741 (Phone)

Christo Angelov Pirinsky

University of Central Florida ( email )

College of Business Administration/Finance
PO Box 161400
Orlando, FL FL 32816
United States
407-823-5962 (Phone)

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