Publication Type

Working Paper

Publication Date

11-2013

Abstract

We develop a simple and tractable model of opinions and price-volume dynamics based on a word-of-mouth communication process widely used in epidemiology. Risk-averse investors have different opinions depending on whether they heard the news from a friend. Opinions initially diverge and then converge over time as news spreads, which leads to price adjustment and trading volume. News released to many leads to an expected difusion rate (the change in the fraction of investors with the news) that declines with time. But news initially released to few leads to an expected diffusion rate that initially increases in time and only then decreases. The serial correlation of stock returns and trading volume are proportional to the diffusion rate. The term structure of the serial correlation of non-overlapping returns can be declining or hump-shaped in time depending on whether the news was widely released. We test and verify these predictions and show that this model is useful for understanding news and price momentum and the dynamics of investor and analyst expectations around media events.

Keywords

Word of Mouth, Information Diffusion, Public News, Private News

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

50

Identifier

10.2139/ssrn.1569418

Publisher

SSRN

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

https://dx.doi.org/10.2139/ssrn.1569418

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