Social network influence and market instability

Models of social networks depict individuals’ dependency. They offer a systematic way to capture the connectedness and opinion formations in the complex web of interpersonal influences. This paper studies price stability of a capital market, where the dynamics of participants’ opinion formations is formalized using social network models. Stability condition is derived. It is also identified how network structures are important in communications and in determining market stability. It is found that factors of highly-connected networks and balanced weight allocation on information sources can in fact be stabilizing. In applications, this study supports the view that the key to reduce the volatility behaviour of emerging-market securities lies in the development of an efficient investor base. It is suggested that one way to achieve this is by broadening and diversifying both the international and domestic investor categories for the underlying market.