Herd Behavior in Financial Markets
In: IMF Staff Papers IMF Staff Papers, Band 47, Heft 3, S. 279-310
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In: IMF Staff Papers IMF Staff Papers, Band 47, Heft 3, S. 279-310
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In: IMF Working Papers
We study herd behavior in a laboratory financial market with financial market professionals. We compare two treatments, one in which the price adjusts to the order flow so that herding should never occur, and one in which event uncertainty makes herding possible. In the first treatment, subjects herd seldom, in accordance with both the theory and previous experimental evidence on student subjects. A proportion of subjects, however, engage in contrarianism, something not accounted for by the theory. In the second treatment, the proportion of herding decisions increases, but not as much as theor
In: International Journal of Economics and Finance Studies, 12(2):581-604, 2020. Doi: 10.34109/ijefs.202012221
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Working paper
In: American economic review, Band 90, Heft 3, S. 695-704
ISSN: 1944-7981
In: American economic review, Band 90, Heft 3, S. 705-706
ISSN: 1944-7981
In: American economic review, Band 95, Heft 5, S. 1427-1443
ISSN: 1944-7981
We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior).
In: IMF Working Paper No. 2000/048
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In: The B.E. journal of theoretical economics, Band 8, Heft 1
ISSN: 1935-1704
We study a sequential trading financial market where there are gains from trade, that is, where informed traders have heterogeneous private values. We show that an informational cascade (i.e., a complete blockage of information) arises and prices fail to aggregate information dispersed among traders. During an informational cascade, all traders with the same preferences choose the same action, following the market (herding) or going against it (contrarianism). We also study financial contagion by extending our model to a two-asset economy. We show that informational cascades in one market can be generated by informational spillovers from the other. Such spillovers have pathological consequences, generating long-lasting misalignments between prices and fundamentals.
This paper is motivated by the recent discussion on the need of market supervisors, regulators, and policy makers, to take into account the behavioral elements of market participant attitudes and psychological and cognitive biases when taking policy decisions. We contribute to the discussion by studying, for the first time, the relationship between conventional and unconventional central bank monetary policy and herd behavior in equity markets, and argue that the transmission channel, through which monetary policy may affect herd behavior, is economic expectations and investor sentiment. We combine a range of research methodologies to measure monetary policy, herd behavior, and their possible relation, and our results indicate that conventional and unconventional Fed monetary policy explains a significant percentage of US equity market herd behavior variance, while ECB monetary policy explains a lower percentage of Eurozone herding variance. Impulse Response Functions indicate that Fed's conventional expansionary policy and non-standard policy reduces the levels of herding in the US equity market, while conventional ECB expansionary policy induces higher levels of herding in Spain and Italy. We also detect spill-over effects from Fed monetary policy to EU market herd behavior.
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In: Working paper series 2007,6
In: American economic review, Band 94, Heft 3, S. 484-498
ISSN: 1944-7981
This paper reports an experimental test of how individuals learn from the behavior of others. By using techniques only available in the laboratory, we elicit subjects' beliefs. This allows us to distinguish informational cascades from herd behavior. By adding a setup with continuous signal and discrete action, we enrich the ball-andurn observational learning experiments paradigm of Lisa R. Anderson and Charles Holt (1997). We attempt to understand subjects' behavior by estimating a model that allows for the possibility of errors in earlier decisions.