HERD BEHAVIOR AND AGGREGATE FLUCTUATIONS IN FINANCIAL MARKETS

Rama Cont and Jean-Philipe Bouchaud

Macroeconomic Dynamics, 2000, vol. 4, issue 2, 170-196

Abstract: We present a simple model of a stock market where a random communication structure between agents generically gives rise to 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.

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (255)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:4:y:2000:i:02:p:170-196_01

Access Statistics for this article

More articles in Macroeconomic Dynamics from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().