Communication, Excess Comovement and Factor Structures

Abstract

I develop a model in which investors communicate before trading in a general equilibrium. Investors repeatedly communicate in a social network but have limited knowledge of the network's structure and thus do not fully realize the consequences of their communication and belief updating. As a result, asset returns contain excess comovement and more concentrated factor structures compared to fundamental values. The model generates testable empirical predictions that are consistent with the empirical literature on excess comovement in asset returns.