Estimating a Structural Model of Herd Behavior in Financial Markets

December 1, 2010

Preview Citation

Format: Chicago

Antonio Guarino, and Marco Cipriani. Estimating a Structural Model of Herd Behavior in Financial Markets, (USA: International Monetary Fund, 2010) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We develop a new methodology to estimate the importance of herd behavior in financial markets: 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 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.

Subject: Asset prices, Asset valuation, Stock markets, Stocks, Trade balance

Keywords: Market maker, WP

Publication Details

Pages:

33
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2010/288
Stock No:

WPIEA2010288
ISBN:

9781455211692
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers