Simulation of Social Media-Driven Bubble Formation in Financial Markets using an Agent-Based Model with Hierarchical Influence Network

TL;DR

This paper introduces an agent-based hierarchical network model to simulate how social media influences can lead to bubble formation and market phenomena like echo chambers and pump-and-dump schemes.

Contribution

It presents a novel hierarchical agent-based model that captures social media effects on financial market dynamics, aligning with real-world stylized facts.

Findings

Model reproduces stylized facts of financial markets

Simulates social media-driven phenomena like echo chambers

Demonstrates impact of social influence on market bubbles

Abstract

We propose that a tree-like hierarchical structure represents a simple and effective way to model the emergent behaviour of financial markets, especially markets where there exists a pronounced intersection between social media influences and investor behaviour. To explore this hypothesis, we introduce an agent-based model of financial markets, where trading agents are embedded in a hierarchical network of communities, and communities influence the strategies and opinions of traders. Empirical analysis of the model shows that its behaviour conforms to several stylized facts observed in real financial markets; and the model is able to realistically simulate the effects that social media-driven phenomena, such as echo chambers and pump-and-dump schemes, have on financial markets.