Publication Type
Working Paper
Version
publishedVersion
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
Citation
HONG, Dong; HONG, Harrison G.; and UNGUREANU, Andrei.
An epidemiological approach to opinion and price-volume dynamics. (2013). 1-50.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5332
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.1569418