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.
Is it Social Influence on Beliefs Under Ambiguity? A Possible Explanation for Volatility Clustering
CMER WORKING PAPER No. 06-46