Risk aversion and herd behavior in financial markets

Stefano Lovo and Jean-Paul Décamps

No 758, HEC Research Papers Series from HEC Paris

Abstract: We show that differences in investors risk aversion can generate herd behavior in stock markets where assets are traded sequentially. This in turn prevents markets from being efficient in the sense that financial market prices do not converge to the asset's fundamental value. The informational efficiency of the market depends on the distribution of the risky asset across risk averse agents. These results are obtained without introducing multidimensional uncertainty.

Keywords: herd behavior; stock markets; efficiency (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2002-05-14
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Risk Aversion and Herd Behavior in Financial Markets (2003)
Working Paper: Risk Aversion and Herd Behavior in Financial Markets (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0758

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