 Herd Behavior and Contagion in Financial MarketsMarco Cipriani and Antonio Guarino Working Papers from The George Washington University, Institute for International Economic Policy Abstract: We study a sequential trading financial market where there are gains from trade, i.e., 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, either 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. Keywords: herd behavior; financial contagion; social learning; informational cascades; financial crises (search for similar items in EconPapers) Published in the B.E. Journal of Theoretical Economics, 8(1), Article 24, pp. 1-54, 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2010-01 Access Statistics for this paper More papers in Working Papers from The George Washington University, Institute for International Economic Policy Contact information at EDIRC. |
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