Herd behavior and aggregate fluctuations in financial markets

Rama CONT and Jean-Philippe BOUCHAUD
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Rama CONT: Dept of Economics, American University & Centre d'Etudes de Saclay, France
Jean-Philippe BOUCHAUD: Centre d'Etudes de Saclay, France and Science & Finance Research Group

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Abstract: We present a simple model of a stock market where a random communication structure between agents gives rise to a heavy tails in the distribution of stock price variations in the form of an exponentially truncated power-law, similar to distributions observed in recent empirical studies of high frequency market data. Our model provides a link between two well-known market phenomena: the heavy tails observed in the distribution of stock market returns on one hand and 'herding' behavior in financial markets on the other hand. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order flow and the tendency of market participants to imitate each other.

Keywords: Stock market; random graphs; market organization; herding; heavy tails.. (search for similar items in EconPapers)
JEL-codes: D84 E32 G19 (search for similar items in EconPapers)
Date: 1997-12-30, Revised 1998-01-06
Note: Type of Document - Postscript; prepared on UNIX Sparc TeX; pages: 29
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