Communication and Con dence in Financial Networks

A growing empirical literature documents that social communication a ects individual trading behavior and market trading patterns in nancial markets. Motivated by this evidence, I develop an asset pricing model a la Kyle (1985) in which agents communicate information in social networks prior to trading. In particular, an agent who is more con dent in her private information puts greater weight on her private signal than on signal received through communication when aggregating her information. The model generates several novel implications. First, proximity between agents in networks a ects correlation of agent demands. Second, individual agent exploits information and in uences price distinctly in di erent networks. The associated behavior enriches some in uential thinking about speculation in nancial markets such as \beauty contest". Third, under certain circumstances social communication is welfare improving for all agents. Fourth, irrespective of di erent network structures, market trading patterns such as market liquidity, trading volume, price volatility and informational e ciency of prices are all higher in the presence of social communication relative to those in economy where agents exploit private signals exclusively. Finally, market trading patterns are strictly decreasing in (a range of) agents' con dence in private signals. Interestingly, social communication can alternatively explain some intriguing empirical facts such as \gender trading di erences" which were attributed to overcon dence. These ndings have not been previously reported in the literature.