American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Estimating a Structural Model of Herd Behavior in Financial Markets
American Economic Review
(pp. 224–51)
Abstract
We develop a new methodology to estimate herd behavior in financial markets. We build a 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 data on a NYSE stock (Ashland Inc.) during 1995. Herding occurs often and is particularly pervasive on some days. On average, the proportion of herd buyers is 2 percent; that of herd sellers is 4 percent. Herding also causes important informational inefficiencies in the market, amounting, on average, to 4 percent of the asset's expected value.Citation
Cipriani, Marco, and Antonio Guarino. 2014. "Estimating a Structural Model of Herd Behavior in Financial Markets." American Economic Review 104 (1): 224–51. DOI: 10.1257/aer.104.1.224Additional Materials
JEL Classification
- C58 Financial Econometrics
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading