Estimating a structural model of herd behavior in financial markets

Marco Cipriani and Antonio Guarino

No 561, Staff Reports from Federal Reserve Bank of New York

Abstract: We develop a new methodology for estimating the importance of herd behavior in financial markets. Specifically, we build a structural model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty. We estimate the model using 1995 stock market data for Ashland Inc., a company listed on the New York Stock Exchange. Herding occurs often and is particularly pervasive on certain days. In an information-event day, on average, 2 percent (4 percent) of informed traders herd-buy (sell). In 7 percent (11 percent) of information-event days, the proportion of informed traders who herd-buy (sell) is greater than 10 percent. Herding causes important informational inefficiencies, amounting, on average, to 4 percent of the asset's expected value.

Keywords: Financial markets; Uncertainty; Human behavior; Information theory (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Estimating a Structural Model of Herd Behavior in Financial Markets (2014)
Working Paper: Estimating a Structural Model of Herd Behavior in Financial Markets (2010)
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