Is it Social Influence on Beliefs Under Ambiguity? A Possible Explanation for Volatility Clustering

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Author: 
Hammad A. Siddiqi
Description: 
CMER WORKING PAPER No. 06-46
JEL codes: 
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Abstract: 
Influencing and being influenced by others is the very essence of human behaviour. We put forward an exploratory asset-pricing model allowing for social influence on investor judgments under ambiguity. The time series of returns generated by our model displays volatility clustering, a puzzling stylised fact observed in financial markets. This suggests that social influence on investor judgments may be playing a role in generating volatility clustering.