When Do Narratives Move Prices? Portfolio Allocation and Narrative Diffusion in Financial Markets

ABSTRACT Why do widely discussed market narratives sometimes trigger large asset‐price movements while at other times have little effect? We develop a dynamic equilibrium model in which narratives diffuse through investor communication networks and affect prices through portfolio reallocation. Narratives influence equilibrium prices only when adoption changes perceived asset values sufficiently to alter portfolio demand. The magnitude of their price effects depends on who adopts, is larger when existing narrative valuation is low, and remains bounded by aggregate wealth. Communication networks therefore shape prices indirectly by influencing the distribution of narrative views and investors' adoption decisions. An empirical application to four U.S.‐listed firms associated with the quantum‐computing investment narrative provides complementary reduced‐form evidence. More favorable narrative coverage is associated with higher contemporaneous abnormal returns, while greater narrative intensity is associated with excess volatility and a higher probability of extreme abnormal returns.