Asset Pricing: Herding vs. Individual Social Interaction

Abstract

The existence of influence among participants on financial markets is affirmed by the theory of behavioural finance through the consideration of sociological aspects. The aim of this paper is to empirically contrast two kinds of social influence, namely herding and individual social interaction. Herding behaviour is well known and has already been intensively examined in the context of financial markets. Individuals that herd, act like the majority does. Individual social interaction refers to the situation, where an individual is influenced by only one or few other individuals and not an aggregated outcome. Due to the lack of required data on the level of single financial market participants, their behaviour is proxied by the behaviour of sell-side analysts. This ensures a good basis for the empirical investigation of this paper. Nevertheless, the analysis of individual social interaction still is challenging. This comes through the fact, that it is necessary to know, by which analyst a particular analyst might be individually influenced. Within this paper, three approaches are presented to estimate these interdependencies. The results of all three approaches are in line and suggest that, although the influence from herding is dominant, the influence from individual social interaction plays a considerable role for the aggregated outcome of the (forecasted) asset price.