(Mis)information diffusion and the financial market

TL;DR

This paper uses an agent-based model to study how information and misinformation spread through social networks influence financial market efficiency and asset prices, highlighting the role of network topology and information quality.

Contribution

It introduces a simulation framework to analyze the impact of private signals and misinformation on market dynamics and efficiency, considering network effects.

Findings

Misinformation can increase market inefficiency under certain network conditions

Information diffusion delays shock absorption in asset prices

Network topology significantly influences the spread of information and market outcomes

Abstract

This paper investigates the interplay between information diffusion in social networks and its impact on financial markets with an Agent-Based Model (ABM). Agents receive and exchange information about an observable stochastic component of the dividend process of a risky asset \`a la Grossman and Stiglitz. A small proportion of the network has access to a private signal about the component, which can be clean (information) or distorted (misinformation). Other agents are uninformed and can receive information only from their peers. All agents are Bayesian, adjusting their beliefs according to the confidence they have in the source of information. We examine, by means of simulations, how information diffuses in the network and provide a framework to account for delayed absorption of shocks, that are not immediately priced as predicted by classical financial models. We investigate the effect of the network topology on the resulting asset price and evaluate under which condition misinformation diffusion can make the market more inefficient.