Estimating A Structural Model Of Herd Behavior In Financial Markets

The authors develop a new methodology to estimate the importance of herd behavior in financial markets: They 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. They estimate the model using data on a NYSE stock (Ashland Inc.) during 1995. Herding often arises and is particularly pervasive on some days. The proportion of herd buyers (sellers) is 2 percent (4 percent) and is greater than 10 percent in 7 percent (11 percent) of information-event days. Herding causes important informational inefficiencies, amounting, on average, to 4 percent of the expected asset value.

Provided by: International Monetary Fund Topic: CXO Date Added: Dec 2010 Format: PDF

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