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American Economic Review: Vol. 104 No. 1 (January 2014)

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Estimating a Structural Model of Herd Behavior in Financial Markets

Article 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.104.1.224

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.

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Authors

Cipriani, Marco (Federal Reserve Bank of New York)
Guarino, Antonio (U College London)

JEL Classifications

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


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