Information Cascades
–https://www.cnn.com/2021/10/29/investing/stocks-october/index.html
–https://www.investopedia.com/articles/investing/052715/guide-understanding-information-cascades.asp
As more and more Q3 reports emerge, and the onset of Q4 reports and the holiday season loom increasingly closer, the stock market is as volatile as ever. After a very bearish post-covid economy, in 2021- the NYSE saw large quantities gains across the market. However, this momentum quickly faded away in 2022; and from January to mid fall, the NYSE composite plummeted. It wasn’t until October, that a light finally started to appear at the end of the tunnel. According to CNN Business’s Paul La Monica over the course of October the “S&P 500 was up 0.2% while the Nasdaq rose 0.3%. Both hit all-time highs and gained around 7% for the month- the most for each index since November 2020”. When changes like these occur after such an extended duration of drought, it is vital to analyze the factors that enabled stock prices to rally.
Surprisingly we’ve actually spent a lot of time in class discussing one of the main driving components behind these spikes; information cascades. In lecture, we’ve deduced that when an individual observes other individuals partaking in a given action, they themselves become more likely to also partake in said action. The same logic applies to investors while they determine which stocks to buy, and which to avoid. Investors are far more likely to purchase stocks, when other people are also buying them. Thus, a very common indicator used by investors is their volume, which denotes how many shares of said stock are sold in a single trading day. Furthermore in 2019, Brunswick Corporation reported that 88% of polled-investors make their trades based on trends and other information that they found online; further highlighting the underlying information cascade that drives investors decision making.
As for the NYSE’s bullish October; this was caused by reports that overall volume across the market was increasing as investors predicted stocks would rally during the holiday period. As volume increased, more and more investors sought to purchase stakes, further increasing the volume. Thus, as investors saw more and more entities purchasing specific assets, they began to follow suit themselves, and copy the trades. This in turn caused prices to rise, accounting for market-wide momentum shifts.