Financial Crises as Herds: Overturning the Critiques

Varadarajan Chari and Patrick Kehoe

No 9658, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned---herds reappear in these models---once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.

JEL-codes: E32 F2 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-dge, nep-fin, nep-fmk, nep-ifn, nep-mac and nep-sea
Note: EFG IFM
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Citations: View citations in EconPapers (14)

Published as Chari, V. V. and Patrick J. Kehoe. "Financial Crises As Herds: Overturning The Critiques," Journal of Economic Theory, 2004, v119(1,Nov), 128-150.

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Journal Article: Financial crises as herds: overturning the critiques (2004)
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